Term Life Insurance Pays Off, What About Death Benefit? Buy An Annuity, Lump Sum, Other Options

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Even when we buy term life insurance, we like to think as little as possible about actually making death claims, so many Americans have probably never evaluated whether their survivors would know what to do with a term life insurance death benefit. Could the benefit be lost? Money management is difficult for most people, so it's worth a bit of forethought.

If a million-dollar lump sum were laid at any of our feet, which of us would still have a cent of it in ten years? We've seen it before: people of once-great affluence become hard up after their income stream ends. Think of sports star O. J. Simpson, who was reduced to shameful thievery. Think of rock star Dee Snyder who was obliged to borrow a friend's bicycle in order to hold down a job. Think of lottery-winner William Post, who went from foie gras to food stamps. He found himself under a debt of $1 million within a year of striking it rich.

The simplest protective measure for your death benefit is to simulate an ordinary income by turning the benefit into an annuity. This means that the benefit becomes a stream of payments—something far easier to manage than a single lump sum. An added benefit of annuities is that they pay more than they cost. (You may have noticed that lottery jackpots usually offer the winner a choice between an annuity of the prize's full value or an immediate payment of only half the value.)

Because your beneficiaries may get more out of an annuity than you put in, it's worth considering when you buy term life insurance just what returns your survivors should expect. You may decide that you can get by with less coverage than you initially thought.

Rather than buying an actual annuity product, you may be able to arrange for your life insurance company to administer your policy's death benefit in annuity-like installments. This will save your loved ones the trouble of shopping for an annuity themselves and also spare all of you the uncertainty of what rate of return the future might offer.

You may choose to leave all or part of the death benefit with your insurance company and have them make payments to your beneficiaries until the death benefit is exhausted. As long as any of the death benefit remains with the insurer, it will accrue interest, which will increase the wealth that your survivors receive.

An interesting alternative is an interest-only death benefit settlement, which pays your beneficiaries only interest on the death benefit. This creates an infinite income stream that can be passed on to heirs in perpetuity. Because the income is only interest, however, this plan requires a large benefit.

Reflect that the death of a loved one is a difficult time to manage finances, particularly in quantities theretofore unfamiliar. It is well worth taking time when you buy term life insurance to think about how your death benefit is to be managed.

Article by WholesaleInsurance.net writer Markham Anderson.

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