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How to make sure 100% of your life insurance goes straight to your loved ones. Whilst avoiding estate taxes and getting stuck in probate!
Wednesday, 15 April, 2020
How to get your life insurance to pay out fast
introduction
Do you have life insurance or are you looking to get some?
If the answer’s yes then the likelihood is you’ve not given much thought to how you set it up.
The chances are that you’ve taken a policy out and you’re the policy owner and the life assured.
That means the policy pays out on your death and you also own it.
It’s a very common mistake which 95% of people make when getting life insurance!
Doing it this way could mean that this money gets hit with estate/inheritance tax….
And it definitely means the proceeds have to go through probate before your loved ones get access to it.
And this could take years leaving them WITHOUT vital resources!
What you really want is for them to get the money as fast as possible and all of it!
They’ll have enough to deal with…
Right?
The good news is, you can make sure that they get 100% of the life insurance within days.
No waiting, a simple process that guarantees the money goes straight to them right when they need it.
It doesn’t matter if your policy is already set up or if you’re looking to set up a new one.
We’re going to show you the best way to do it!
Keep reading below and you’ll learn exactly what you need to do….
isn't that the point of life insurance anyway?
We set up life insurance policies so that the people we care about have financial resources.
We want to know that after we’re gone they won’t have to struggling to make ends meet.
So it makes sense that we’d want them to have this available to them as soon as possible.
Guess what this is totally possible and you’ve got a couple of options available to you.
Even if you’ve already set up your policy, it’s not too late.
You can still make a few changes that are going to make a massive difference.
When we set up life insurance we choose the benefit amount that we want it to pay out.
We decide on this sum because this is what our families and loved ones need.
Imagine if they had to wait for this money for over a year…
And when they got it, its about half of what they expected!
small things make a big difference
Depending on where you’re living this could happen if you don’t have your policy set up in the right way.
In some countries estate taxes are as high as 55%….
Setting up your life insurance so that you’re the policy owner and the life assured is a problem.
Doing this means that if the time comes to claim on the policy the payout goes into your estate.
Remember, that’s because you own the benefit that get’s paid!
Your estate needs processing and this usually takes the form of probate.
This is never the fastest process and even if you had all your ducks in a row this takes a long time.
The quickest an estate would clear probate is around 10 months…
Though it could be years depending on where you live.
Right now you may be saying, “that’s not a problem for me I’ve nominated beneficiaries on my policy”.
Here’s the thing…..
Some countries don’t recognise this and they’ll still make the benefit part of your estate.
If you’re an expat nominating, beneficiaries might work for you right now.
What happens when you move to another country?
It may not be effective there and would you know?
If you die in a particular country their rules need following and also those of your home country.
So if the life insurance payout falls into your estate things can get pretty complicated.
We all know what complicated leads to…….
That’s right delays!
what will it take?
There are two options available to you if you’ve not set your policy up yet.
And if you already have a policy then only one of them will work for you.
The good news is it’s the best one!
So what are these two options available to you?
The first is setting up the policy “on the life of another”….
This means that you’re the life assured and someone else owns the policy.
And it is easy to do when you’re setting the policy up!
The other option that’s available whether you have an existing policy or not is……
“Writing the policy into trust”
This may sound daunting, though it’s much easier than you think.
In fact there are two simple steps,
step 1 choose the trustees & step 2 choose the beneficiaries!
What this means the people you want to have the money get it
And they everything that you want them to have, fast.
life of another
If you’re going to set up a policy then this is a great way to make sure, the benefit payment falls outside your estate.
So what do you need to do?
On a life insurance application form one of the first section is usually “Details of Life Assured”
This is the life that benefits will pay out on.
If this person dies the chosen benefit amount will pay out…
The next section will usually be ” Policy Owner (if different from the Life Assured)”
Here’s where you make the difference…
Most people ignore this section and leave it blank…..
Which is why the life assured ends up owning the policy….
Completing this section, will mean that the benefit payment belongs to someone else.
Well as long as the the life assured and policy owner are two different people… dah!
What this means is benefits get paid quickly and in full to the people you want.
Who needs to be the policy owner?
It must be an adult and generally it would be the life assured’s spouse or partner.…
It should be the person who you want to have access to the benefit payment.
it's not a perfect solution
This method has some short comings which are…
First of all if the life assured and the policy owner were to die together
Then you have the exact same issues.
The benefit payment would go into the policy owners estate.
Which could mean it gets hit with estate or inheritance taxes
And it would get stuck in probate.
Also if you’re setting up the policy to benefit minors.
They can’t own the policy!
So this method wouldn’t work.
Which would be a big issue for single parents.
writing the policy into trust
The other option is to write the policy into trust and in every way this is a much more complete solution.
And whilst, you may think that this is a daunting concept it’s simpler than you think…
As we mentioned earlier it’s a two step process involving the completion of an extra form and that’s it.
A word of warning…
Once you’ve put a policy into trust there is no turning back! It has to stay in the trust.
So what are the steps involved?
step 1
Is probably the most difficult and time consuming, well for some people anyway and for others it may be very easy.
This is the part where you choose the trustees.
Who can be a trustee?
Well pretty much anyone, as long as they are over 18 and are of sound mind…
The trustees become the legal owners of the policy.
They are responsible for the administration of the trust and the assets in it.
And they should do it by following the rules set out in the trust document.
The trustees have the power to distribute the monies in the trust to the beneficiaries.
In certain circumstances they may be able to determine which potential beneficiaries benefit.
For example if you had beneficiaries who were over 18 and others below that age.
They would pay the beneficiaries considered as adults.
Then invest the monies for any minors until they reached the age of 18.
The person creating the trust may set some guidelines for who they want to benefit from the trust.
The trustees may use this as an indicator though it isn’t binding.
Trustees should consider the interests of the potential beneficiaries before making distributions.
You need a minimum of two trustees and if anything happens to one of them then they’ll need replacing.
If you’re the life assured then you can be a trustee, though until there’s a claim there won’t be much to do.
Especially with a term life policy.
Though if the life assured wants to make any changes to the beneficiaries at anytime.
They’ll need the approval of the trustees to do so…
So being one could be very useful in this sense
If it’s a life insurance policy only, a claim will mean the life assureds not around.
Otherwise there wouldn’t be a claim. Right?
BOOM!
You’re one trustee down, at a time when they’re needed the most.
So, having three trustees makes sense, because there’s no mad panic to find another, if you lose one.
Having extra benefits on your policy such as disability or critical illness.
Means that payouts can happen when the life assured survives.
It’s likely that they’ll want a say in what happens to this money…
So the life assured being a trustee will allow them to do this.
A beneficiary can also be a trustee as long as they are over 18.
It’s a good idea to do this especially in the case of a surviving spouse or partner.
Any other trustees should be family or friends who you would trust.
People who you know will have your loved ones best interests at heart.
You may want to have more than one especially if there are kids who are potential beneficiaries.
If something happened to both parents at once there is the money and the mechanism to ensure the kids are cared for.
You could also appoint professional trustees such as a lawyer.
Though this would obviously incur extra costs.
Once you’ve chosen your trustees you need to ask them whether they are prepared to do it.
This is important as there is a great deal of responsibility involved.
Now you’ve decided on your trustee’s it’s time to move onto the next step.
step 2
This step is to decide on the potential beneficiaries of the trust.
You can set different levels of beneficiary in the form of primary or secondary.
This means that you can have your spouse or partner as a primary beneficiary.
You could leave 100% of the benefit to them.
If you have three kids then you can leave a third of the benefit to each of then as secondary beneficiaries.
This means that if there’s a claim on the policy the surviving spouse gets access to the proceeds of the policy.
Which is how you would want it. Right?
If something happened to both parents at the same time, the secondary beneficiaries move up the rankings.
Though as we stated earlier this doesn’t mean that the money is going to get paid out to them is they’re minors.
Though it will be used for their benefit until they turn 18.
You may have other people who you want to benefit from the policy and you need to decide where these people fall.
Are they going to be primary or secondary beneficiaries and what do you want them to have.
If you name two people as primary beneficiaries and one of them has passed away when there’s a claim on the policy.
The share that you allocated to them will pass to the secondary beneficiaries.
And will get distributed according to the split that you you set out.
Again if they’re minors then they won’t get it straight away.
You now know who you want the beneficiaries to be and in what order you want them to benefit.
You’ve also got the split that you’re happy with.
At this stage the only thing left to do is complete the trust form.
what you should know
Below is a summary of what we’ve covered and the solutions available to you.
We’ve established that it’s common for people to set up their life insurance in a damaging way…
You may have done this already and you’re the life assured and the policy owner.
What does this mean?
If your policy is set up in this way right now and tomorrow your loved ones had to make a claim.
They could end up getting back much less than you wanted them to have…
And even worse it might take them years to be able to get it.
Because the benefit is falling into your estate.
This is completely avoidable and you have two solutions available to you.
Either one will ensure that the people you care about get paid 100% of the benefit amount.
And they get it paid within days or weeks after the claim’s submission.
If you don’t have a policy and you’re looking to set one up…
Then make sure that you get it right from the start.
Your family will have enough to deal with!
Having the stress of dealing with estate taxes, probate and struggling to make ends meet...
Is too much to put on them.
Whichever works best for you is up to you to decide…
Setting the policy up “On the life of another” or putting it into trust gives you the outcome that you want.
You’ve made sure that the people who are most precious to you, can take care of themselves. Imagine!
This post is based on people using a policy that has no surrender value. Or an investment linked policy, in trust for benefit of a person with a physical or mental disability.
We’ve put together a bonus guide to help you complete a trust application form. Subscribe to receive our updates and we’ll send you this bonus material.
It will help you breeze through the trust form and making the process even easier!
Easy Right?
If you’re using an investment linked policy for anyone without a disability, advice may differ.
Especially with regards to estate or inheritance taxes.
This will also vary depending on residency and nationality.
We’re sure that you’ve found this post helpful.
If you need further assistance with your life insurance feel free to contact us and we’ll do our best to help.
Also we’d welcome your feedback so please comment. Also if you could share we’d be very grateful and it would help us to keep producing useful content for you.
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