When a loved one dies, money is the last thing you want to consider. But if your loved one had life insurance, that means they wanted you to make use of it to secure your future financially.
All you need is to collect the life insurance proceeds and use them to cover funeral expenses. You also help them to pay off debts and even help support yourself and your family.
Unfortunately, this is not always the case. For example, the life insurance proceeds might be subject to probate if the deceased did not have a will. Hence, if you decide to buy life insurance, have a probate lawyer by your side to help. This will keep your heirs from having to go through probate.
While it may seem morbid to think about it, life insurance is a vital part of financial planning for many people. It takes care of your dependents who rely on your income.
The life insurance claims process can be challenging, so it’s important to know the basics. This article will explore vital information about collecting life insurance proceeds.
Identifying the Beneficiary
The first step in collecting life insurance proceeds is identifying the beneficiary. When you purchase life insurance, you select the beneficiary. This might be either a person or a company.
In line with an estate planning law attorney in Orange County, choosing a beneficiary is a must. If there is no will, the beneficiary is usually the person who receives the life insurance money.
Some policies allow you to state someone else as a beneficiary. If there is a will, the terms usually dictate who gets the money if the policyholder dies.
If you list a specific person as the beneficiary, you will have to get that person to sign a written directive. Such a directive is a contract. The person who receives the proceeds can sue the insurance company if they are not well treated.
If you are a life insurance policy beneficiary, you must consult with a probate lawyer. They ensure that the proceeds go according to your loved one’s wishes.
How to Collect the Proceeds?
The next step in collecting life insurance proceeds is to go and collect the money. If you are the named donee of a life insurance policy, you may wonder if you still need a will lawyer to help you get the proceeds.
The answer depends on many factors, including your state and link with the deceased. Most life insurance companies have a specific method for doing this. You will need to visit the company and explain why you want to withdraw the money. This is not a process you wish to go through to collect your money.
You will have to fill out paperwork and provide detailed documentation. Most companies will give you a specific form that you must use.
The most important part of that form is the section where you write down the policy number. You must know this detail to locate your policy.
Taxes on Life Insurance Proceeds
Once you collect the money, you will have to pay taxes. Of course, this is true of all money you receive but knowing about the specifics of life insurance proceeds is vital. Life insurance proceeds are usually considered “once-in-a-lifetime” money.
This means that you will have to pay a high-income tax on the proceeds. The highest rate is 39.6%, 9 percentage points higher than the highest ordinary income tax rate.
An estate planning attorney will tell you against taking out a retirement loan. Instead, you should take tax-free draws from life insurance earnings for a set period.
If you violate the rules, the money will be taxable at your usual tax rate, leaving less money for your survivors.
The loan provisions in the policy will allow you to take out a loan from the policy’s proceeds. You will have to pay interest on the loan for the period. This can you cost tens of thousands of dollars. But, there is a potential loophole here. If you take the loan, have enough money to pay it off, and do not use the rest, the insurance company will ignore it.
When Beneficiary Dies Before the Policyholder
If the beneficiary dies before the policyholder, the life insurance payout belongs to the survivor. Yet, the probate court will still have to file a will.
No matter how long it elapses between the policyholder’s passing and the beneficiary’s. First, the court must determine if there is a valid will. In this case, the court must decide who receives the deceased’s assets.
But, before the court can decide who gets the money, it has to file a probate proceeding. A probate proceeding is the court filing a will and ensuring it’s filed according to the state’s laws. A probate proceeding may take a long time and significant money to complete.
How Much Money Can You Expect to Receive?
The life insurance policy’s terms will dictate the amount you can expect to receive. This will vary from one company to another and one policy to another. Thus, you will want to compare shops and get many estimates to ensure you get the best deal.
This might assist you in ensuring that you are set for the worst-case scenario. Be sure to read the fine print to ensure that you get all the benefits you pay for. These may include accidental death, disability, and hospitalization.
Get a Trust
A trust option is a fantastic option for your life insurance proceeds. A trust is a legal arrangement that holds property for the benefit of another person or entity. In this case, the beneficiary is the trust.
The trust can hold the life insurance proceeds until the death of the trust donee. The trust may also pay a part of the assets in a career health plan.
Life insurance is much harder to access if a beneficiary dies before you. There are trusts lawyer available to help you with such a case. In this case, the money goes into the trust. The remaining money might go to a surviving spouse, children, or parents. This also increases the amount of money they would receive in the event of your death.
Reviewing the Policy With Your Probate Lawyer
There are several advantages to using a legal professional while collecting life insurance proceeds. A lawyer can:
- Help you with estate planning.
- Help you with financial planning, including retirement planning.
- Do insurance planning, including life insurance.
- Help you with health care planning.
- Take care of many other things that you may not have considered.
To Wrap Things Up
You purchased life insurance in the event of the death of the policyholder. If the policyholder dies before the beneficiary, the policy will pay a death benefit. If the policyholder dies after the beneficiary, the beneficiaries will receive the death benefit.
It is crucial to follow the death claim procedure to avoid issues. It is also necessary to take advantage of the life insurance trust option. This can help to avoid having the death benefit money taxed at the ordinary income tax rate.