It’s September, which means it’s also Life Insurance Awareness Month aka LIAM. When asked what we planned to do for LIAM we just sort of laugh. We talk about life insurance on a daily basis, so we’re not likely going to make any changes to our plans for one month as we spend all year advancing the discussion on life insurance.
But I do suppose we could take a minute and alter the focus on life insurance just a little bit when it comes to the way we traditionally discuss life insurance. For the most part, our fascination with life insurance is grounded in its incredible ability to generate cash and its complementary nature to overall portfolio design. The death benefit portion is leverage-able, and that’s cool, but by and large we do admittedly skip over one of the most crucial aspects to this product: the fact that is does pay a death benefit.
Death, it’s not a Fun Topic
Who likes to talk about their demise? I don’t, and I don’t suppose I’m all that unique. As we age, or as we’re forced to deal with the demise of those we know and care about, we often become more complacent with the inevitability of death. But it’s still not a fun subject.
And just like any other task or consideration that doesn’t conjure up feelings of kittens and rainbows, planning for our demise is often put off. But unlike filing our income taxes or paying the cell phone bill, there’s really no set deadline on this one, and if we wait long enough we’ll never have a chance to get to it.
The only problem that procrastination presents on this subject is that if we wait until it’s physically impossible for us to address, than there is a host of people who are potentially impacted, and that impact goes way beyond their simply needing to cut back on expenses.
Death, especially premature death, is an earth-shattering event for those who must carry on without you—one from which some people may never fully recover. As someone who has been through the experience both personally and professionally I can tell you that it’s extremely difficult to navigate.
While agents are not equipped to necessarily handle the psychological battle that sometimes ensues, they do play a crucial role in trying to manage the crisis to mitigate further problems.
It’s easy to review someone’s situation and recommend an amount of insurance that they need to meet shortfalls that would exist upon death, but actually implementing that plan is another story and doing it successfully is what separates the men from the boys (or the women from the girls).
Emotions, they get in the way of Everything
Ever watch someone do something you thought was crazy and wonder why he or she did it? Ever have an extremely emotional moment and do something you later wished you hadn’t? Coming to the realization that someone close to you is gone and never coming back can send you into a world of crazy thoughts and behaviors. The situation is tough enough emotionally; leaving someone behind with no money is even worse.
But money isn’t going to make the despair go away—in fact sometimes it acts like a gateway drug to bad behavior. The good news is, the life insurance industry is well aware of the problems it fixes and does have pretty good resources to accommodate the grieving.
Additionally, it’s good to know exactly what to expect when it comes to the actual payment of the claim, so here’s a quick reference to know how it works.
The Claim Process
The processing of a claim at a life insurer is really expedient 9 times out of 10. The only time it might be slowed down is when the insured dies within the contestability period, at which point in time the insurer will do it’s due diligence and investigate the claim to ensure no fraud has taken place—keep in mind that it’s unusual for an insured to die only two years after a policy has been issued and the company does have a fiduciary responsibility to either policy holders or stock holders to ensure that it’s not just throwing money away.
Generally speaking, the only requirement for proof that the insured has died is a death certificate. If you want to provide even more evidence and send in a copy of the obituary you can do that, and some companies will ask if one is available, but it’s not an absolute necessity.
Processing time generally takes about 30 days (often times even less). The money is first paid out through something known as a retained asset account. A few years ago these accounts were criticized by certain media outlets for reasons that never really made a lot of sense—more of a let’s spin a story into something that sounds much worse because we’re having a slow news day. Nonetheless the NAIC (National Association of Insurance Commissioners) decided to issue a guideline to consumers regarding these accounts, which you can find here.
The accounts to have checkbooks attached to them, but the do come with certain restrictions regarding the size of an individual check you can cut. The best advice for most people is not to attempt making purchases with the account, but rather using the checkbook to draft checks to yourself to place the money in your bank account when you need the money to make a purchase.
Generally speaking, retained asset accounts pay pretty competitive interest rates so leaving the money in the account until you need it is pretty good advice. This won’t always be true, so do check on what the declared interest rate is before you settle on any given strategy. Once the money comes out, it can't be put back in.
Who is the Beneficiary?
It happens more than I wish was the case, but sometimes people have a policy and no one seems to know who the beneficiary is. This happens frequently for individuals without a surviving spouse and no adult children.
In these situations, contacting the insurance company with a policy number, or the insured’s date of birth and social security number will get the ball rolling.
If the person who calls is not a named beneficiary the insurance company will not be able to disclose any information. They will however, reach out to any beneficiaries that they have listed on file.
One of the most frequent questions asked regarding life insurance is the taxable consequence of a death benefit. For most people there are none.
Life insurance proceeds are not income taxable. They are however estate taxable so you should check on the state estate tax limits (we have a guide here) and remember that any assets in access of $5.25 million or subject to Federal Estate Taxes if the assets are not moving to a qualified spouse.
Also, if the contract had a different owner, insured, and beneficiary then the proceeds will be subject to gift taxes as per the Goodman Triangle regulations. For most people, this won’t mean much because gift tax credits can be used, but if you happen to have a policy that has created a Goodman Triangle, it’s generally best to eliminate this by making some changes.
Once it’s Done it generally can’t be Undone
Lastly one important note: Once a claim has been paid out, there’s usually little that can be done to change it. This means if the insured had an old beneficiary that doesn’t make sense today, there’s little one can do to prevent payment to that beneficiary.
In addition, since life insurance is a binding contract, it trumps any suggestions made by a Last Will and Testament. In other words, it doesn’t matter that someone’s Will stated that life insurance proceeds were supposed to go to person X, if the beneficiary is Person Y, the insurer is legally obligated to pay person Y.
For this reason, it’s very wise to review beneficiary designations every couple of years to ensure that they still match up with your wishes. Making changes—if needed—is a simply process handled either by your agent or the insurance company’s customer service department.