Life Insurance Beneficiary or Lottery Winner?
One of the saddest things for me to witness is someone who has passed away without life insurance but has a family who could have benefited from life insurance proceeds after the death. While the family is grieving, they have to find enough money to bury their loved one. Sometimes they have to move out of their home because they can no longer afford to make the mortgage payments without the other source of income. Children may even have to drop out of school because they can no longer afford the tuition. Life insurance could have made a difference in these instances. However, life insurance alone is not the answer.
I have experienced a few instances when a loved one has passed away with life insurance and the beneficiary went through the money quickly and mindlessly. Undoubtedly not what was intended by the policyholder. Sadly, a man came into the bank to inform us that his wife had lost her battle with a terminal illness and recently passed away. Within a week life insurance proceeds of $250,000 were deposited into his checking account. A couple of weeks later we noticed that he started making large withdrawals to make purchases. He purchased cashier’s checks to purchase items including a luxury automobile. Yes, it was his money to use as he pleased. Since his spending habits before his wife’s death were drastically different than immediately following her death, we were concerned. Also, he had small children to care for. I knew it was none of my business how he spent his money. I was just thinking about the main purpose of life insurance. It is to replace income in case of the premature death of someone. That is not the only purpose but is the main purpose.
For some, depending on their age and/or level of financial literacy, getting life insurance proceeds is like winning the lottery. Statistics show that 70% of lottery winners decide to take the up-front cash and end up broke again within two or three years. It is sad but true. Life insurance beneficiaries need Financial Education or a testamentary trust to help them maximize the proceeds of the policy. Talk to an attorney about setting up a testamentary trust for your life insurance beneficiaries. Talk to a financial planner or a financial adviser about managing life insurance proceeds. All the best!
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