When buying a life insurance policy you don’t necessarily have to have the death benefit paid out in a single lump sum upon the death of the insured. You can also opt to have benefits paid out over a period of several years. This arrangement can be beneficial in several ways.
Insurance proceeds are often needed over a long period of time
Though money will be needed upon the death of the insured in order to pay for final expenses and residual medical costs, the most common need for life insurance benefits is usually to replace lost income. This is especially true if the insured is an income earner. Benefit payout plans can be stretched out for as many as 30 years, depending upon the insurance company.
By setting up an installment plan – rather than taking the benefit as a lump sum – the insurance proceeds can provide the income needed. Let’s say that you are a wage earner, and you have children who will not be emancipated for another 10 years. If you set up the benefit to be paid out over 10 years, there will be an income for your family until your children are old enough to take care of themselves.
Prevents spendthrift issues
Even within your own family, the ability to handle finances can vary from one person to another. If you are not entirely comfortable with the ability of the primary beneficiary to manage finances after your death, installment payments are the perfect way to handle this. In fact, installment payments are sometimes referred to as a “spendthrift provision”.
This will make sure that even if the primary beneficiary mishandles the money in any given year, there will always be more coming in during subsequent years to help take care of the family.
Avoids bad financial decisions during an emotional time
Sometimes the reason that the primary beneficiary is unable to properly manage the family finances in the event of your death has nothing to do with being a spendthrift. The loss of a family member can be emotionally devastating, and lead to irrational behavior. This is especially true in the months and years immediately following the death.
But if you set up an installment plan, this will make it easier for the family to transition past the delicate time of the loved one’s death. Even though mistakes may be made early on, more money will be available for later. It will minimize the impact that emotional distress will have on the family’s finances in the early years. We can think of this is being an insurance policy on the insurance policy – a way that preserves the benefits over many years, rather than awarding them up front.
Premiums may be lower
Some insurance companies will even lower the premiums on policies that include installment plans for payment of benefits. They are able to do this because they are able to invest funds in the plan even after the death of the insured. The investment returns enable the company to lower the premiums, which will be compensated for by the returns themselves.
The premium reduction can be as much as 20%, and can make a noticeable difference. You can even use the savings to buy more coverage than you would otherwise, which is a double-win when it comes to life insurance.
If you’re buying a new life insurance policy, consider going with the installment plan option. And even if you have an existing policy, contact your insurance company about converting the death benefit to an installment plan. This can be particularly important if you’re concerned with any the issues above. Your beneficiaries will be taken care of, even if there is a certain amount of mismanagement, whatever the reason.
