The pay-out from a life insurance policy is an unusually large lump sum of money for most people. It can be a life-changing amount that really eases a financial burden - pays off a housing bond, clears debt, or takes care of the school fees. To make sure the money is used wisely, it’s a good idea to talk to your beneficiaries about how you think the money should be used.
We’ve come up with some ideas you and your beneficiaries can use when you discuss, plan and spend a life insurance pay-out.
The conversationWhen you take out a life insurance policy - or if you already have one - it’s a good idea for you, the life assured (the person whose life is insured) to talk to the beneficiaries (the people who will receive the pay-out when the life assured dies).
You want your beneficiaries to know:
- That you have taken out a policy
- Where the policy documents are (eg, on your computer, or in a filing cabinet)
- That you have named them as beneficiaries
- The details of the policy and how they can claim
- What you would like them to do with the money
For example, you as the life assured might have named your husband as beneficiary so he can use the money to pay off the house and invest the rest so he has an income to help with monthly living expenses.
How to spend a life insurance pay-outAs the life assured, you have taken out a life insurance policy for the beneficiaries to use for a better financial future. You want them to spend it for this purpose.
There are many different ways you can spend a life insurance pay-out. We’ve listed some below. You can use these as a guideline in your discussions with your family.
- Pay off all debts and if there is any over invest the rest
- Pay off some debt and invest some for an income
- Invest it all for an income or future expenses
Don’t make big money decisions when you are grieving
Of course, you can’t control what your beneficiaries do with the money. Circumstances and priorities do change, and they need to be able to make decisions accordingly. For example, the original plan may have been to pay off a house, but your beneficiary might decide to move in with a family member. Or the plan was to pay for children’s education, but by the time the policy is paid out, they have graduated. In these cases, the money might be invested to provide an income, or for growth.
What if the beneficiaries are minors?If the beneficiary is under the age of 18, you can set up a trust, and the money will be paid into that. If the money is paid to a trust the trustees decide on how to spend the pay-out.
You should leave a letter detailing how you want the trustees to administer the trust and which expenses to pay from the trust. This could be something like saying the funds can be used to pay for a university education, but not a gap year luxury cruise around the world. Leave this letter with your will or your lawyer, or with the trustees. Your lawyer or financial advisor can assist you if you want to include specific instructions in the trust deed. Remember that while you want your instructions to be followed, they need to be reasonable, legal and not violate the Constitution.
If there is no trust, the money goes into the Guardian’s Fund. In the case of the Guardian’s Fund, regulations stipulate only certain expenses are paid until the minor reaches 18 years, when they receive the remaining lump sum.
A life insurance pay-out leaves a memory foreverThe death of a loved one is difficult. There is grief, but there are also memories of the special moments and times together. One lasting legacy we can leave our loved ones is a strong financial foundation. This is the legacy you leave with your life insurance policy. Some guidance on how to spend it wisely makes sure that foundation leads to a better future.