At any time when a policy falls due, you have a choice of what to do with the money. If you outlive the whole life insurance policy and are able to receive a lump sum, or your endowment policy matures after a specific number of years, there are a number of options to consider.
It’s important to wait before you rush into decisions as to what to do with your nest egg. The most obvious thing is not to rush out and buy that sports car you’ve had your eye on for the last twenty years. While many people have used their policy contributions as a forced saving for important matters such as children’s education, or a bigger house, or a revised retirement plan, always talk to your financial advisor before making hasty decisions.
Some points to ponder
If you don’t need the money, and prefer to continue the policy until you pass away, this can be the easiest choice. Some policies offer a renewal feature, which allows you to automatically extend your policy without the need of a medical examination. However, the premiums for the same amount of coverage will be higher, since you will be older than when you signed up for the original policy.
A policy pay out at any stage of your life can be most useful in settling debts – particularly paying down bonds, removing high-interest credit card debt, or even settling the student loans your children may be labouring under. Getting rid of debt – even while seeing your pay-out dwindle – means you can live your life with greater financial freedom, and find yourself able to save for those more pleasant future rewards, such as a holiday or a revamp on your house that will definitely value-add to that asset.
An emergency fund
A good idea is to put this money away in an accessible savings or money market account that can be used for any unexpected events. A backup for medical issues, especially as you are getting older is wise, together with a safety net for car accidents or house repairs. The recommended emergency fund is usually 3 – 6 months of salary set aside to assist in times of trouble, or if you lose your job. A pay out on a policy is a perfect time to set up this fund or bolster what you may have already organised.
Purchase an annuity
This can create a guaranteed income and help with paying monthly expenses. Indeed, some life insurance policies may have an annuity as a settlement option. There are different types of annuities aimed at accomplishing different goals. Some annuities focus on providing a guaranteed income stream that begins either immediately or in the future. Others are designed to help you accumulate savings for long-term goals like retirement. Once you choose this route, then there are further choices available. Always speak to a professional financial advisor to find the right route for you.
Another choice you can make if you don’t need the money immediately, is to invest the lump-sum in a mix of stocks and bonds for potential growth. You may need help in determining what is best for your age, goals, and risk profile. The purpose is invariably to add a supplementary percentage to your retirement funds. There’s no doubt that astute investment in a diversified stock portfolio will generate compound growth over time – growth that can create real wealth.
This is one of the biggest options for your pay out. Often, by the time policies mature, your children are facing tertiary education, which depending on their choice, can be seriously expensive. You can use your pay out directly – or use it to kick-start a fund specifically for education, growing it over the years when your children are growing, holding these assets in a custodial account while they are minors.
Receiving a large sum of money can have its drawbacks, specifically with regard to tax. The value paid out could put you into a higher tax bracket for the year, and the mature cash value may not be tax free if you withdraw it. In addition, if you have taken loans or withdrawals from the policy during its specified time span, you could potentially come out with less money than expected.
In some instances, where all financial needs have been provided for, the pay-out may be used to support a charity or foundation. For instance, you could purchase a permanent life insurance policy such as a whole life policy, and designate a charity as the beneficiary after you die. In this way, as a donor you retain ownership of the permanent policy during your lifetime, which allows you continued access to the policy’s cash value if needed.
Check your policies, check your life
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