Worried about giving too much money at one time?

BY ANDREW STEWART

In many conversations, I have each week with parents regarding their insurance needs and desires, it is very common for parents to want to name their young children or even adult children as beneficiaries. Most times this is not an issue to do this on your insurance policy, as long as a trustee is named for underage children. But there is one more question parents should be asking themselves, is your child responsible enough to handle a large sum of money?

For some beneficiaries, receiving an inheritance, especially one of some monetary significance, can feel like a windfall. Proceeds from a life insurance policy or savings account are often distributed to beneficiaries in one lump sum payment. As generous as it may seem, does it make sense to hand it all over all at once?

The Gradual Inheritance Strategy is designed to provide a beneficiary with a series of guaranteed income payments over a period of time. This graduated approach is intended for those who are concerned about passing on large sum death benefits to a beneficiary who is young or inexperienced at managing money. Or you’re a parent who wants to provide lifetime support for an autistic child who is financially dependent. This approach also provides beneficiaries with a controlled income stream to ensure that the money is not all spent at once.

By using this strategy, you are requesting that the death benefit proceeds are used to purchase an annuity for your beneficiaries. The annuity will pay the death benefit in a series of guaranteed income payments, over a period of time of your choosing.

How does it work?
The insurance company will ask you to complete a form and indicate how the proceeds of your life insurance account will be paid. Your decisions will include:

• Who your beneficiaries are (you can name one or multiple)
• What portion of the death benefit will be paid as income payments, and what portion (if any) will be paid as a lump sum.
• If the income payments will last for the life of the beneficiary (life annuity) or for a certain number of years (term certain annuity)
• Also works if you have a trustee for a minor assigned on your policy

Upon your passing, your beneficiaries will receive a guaranteed income, in the manner you have specified. They cannot change the annuity option, or how the proceeds are paid. If at any time you wish to make changes or choose to remove the Annuity Settlement Option, simply provide new written instructions.

Family example
Andrew has a $500,000 insurance policy. He has named his daughter Ciara as the beneficiary but is concerned that a large sum of money would be too difficult for her to manage. He is also concerned that her husband would sway her to invest the money into his furniture building business. He would prefer that Ciara receive a small portion of the money at his passing, and the rest be given to her monthly over a period of time.

After discussing the situation with his family advisor, Andrew decides to use the Annuity Settlement Option. He’s decided that 20% of the death benefit will be paid immediately on his passing, and the remaining 80% will be used to purchase a 10-year Term Certain annuity which will gradually pay the rest plus interest, over a 10-year period.

Benefits over a formal trust
A formal trust is another way of specifying how and when funds in an account can be used. Many different types of assets can be held in the trust, such as cash, stocks, real estate and so on. A lawyer is required to draft a trust document. The Annuity Settlement Option can achieve many of the same goals, with the follow advantages.

• No setup costs
• Simple to establish and has no ongoing management fees
• You can change the amounts and beneficiaries at any time with having to pay a lawyer