Life Insurance guarantees peace of mind against the unexpected.
Life insurance is a way to protect your loved ones by building up financial security. Here’s how it works. As a policyholder, you pay a monthly or annual fee – known in insurance-speak as a “premium”– to the life insurance provider for an agreed benefit payout and over a certain time period. The life insurance company promises to pay that benefit amount to your beneficiaries upon your passing. So, if you buy a $100,000 insurance policy, your beneficiaries get paid that amount, which is also 100% tax-free.
How do you choose a beneficiary?
Beneficiaries are those people who depend on you financially. They’re usually spouses, children, parents or siblings. When deciding on your beneficiaries, think about who might need funds for future education, a marriage or even a down payment on a home. You may also want to designate funds to pay off debts to cover your funeral expenses. This is where a Last Will and Testament is helpful: it details how you would like the payout to be distributed.
What if you don’t choose a beneficiary?
Without a beneficiary selected, the payout automatically goes to your estate. If you don’t have a will, it gets more complicated. The executor – the person who is appointed to take care of your affairs ¬– or a family member will need to apply to the courts to administer your estate, which takes time and costs money. So, it makes sense to prepare a will in advance and direct how you want to divide up everything you’ve worked so hard for.
If you should pass away, your beneficiary or the executor should contact the life insurance provider to notify them of your death. The life insurance provider will request documentation, stop further premium charges and then process the payout of the lump sum.
What happens to assets and pension?
Your assets and pension are separate from your life insurance policy and will be distributed as per your wishes in your will. If there is still money owing on an asset like a home or a car, then these can be paid off from the insurance payout. Now you can see why life insurance is so important – it helps pay off debt, so you don’t leave it for your loved ones. As for your pension, you will have designated your beneficiaries when you originally set up your plan. In most cases, your pension would automatically get paid to your spouse. Otherwise, your pension can go to another designated beneficiary, or it can be paid to your estate.
How does a beneficiary receive a life insurance payout?
There is only one way for a beneficiary to receive a life insurance payout, and that’s in one tax-free lump sum payment. If your beneficiary is an adult, they will receive the payment outright. If the beneficiary is a minor, the funds would be paid to the trustee who is named in your life insurance policy. This trustee would deposit the funds in an investment trust account to grow until your beneficiary is old enough to receive them.
Did you know that the cost of life insurance goes up with age? Securing life insurance now while you’re younger and healthier can help you lock in lower rates for the future. So, it makes sense to start planning now. Book an appointment with one of the Licensed Life Insurance Advisors at CAA and feel confident knowing that you’re one step close to ensuring financial security for your family.