When a person sets up a life insurance plan, their aim is usually to make sure that there would be a sum of money available if they were to pass away unexpectedly. People have various motivations for setting up life insurance, however the main ones are usually to pay off a mortgage or other debt (so that the surviving family members are not stuck with repayments they can't afford), to provide an ongoing income for family (this is particularly important if the person being insured is the main household income earner), and to cover any other final costs (for example funeral costs or legal bills).
For some of these common needs, like covering the outstanding mortgage balance, an insurance lump sum is usually the most useful option. This gives the recipients the ability to cover the whole debt, making sure that this is totally and immediately cleared. For most families, using insurance in this way removes a significant financial burden, as well as relieving the stress that comes with it. However for other life insurance needs, a lump sum can cause unexpected problems.
One of the main unforeseen issues that a life insurance lump sum can cause arises when the surviving family members are not equipped to deal with a sudden sum of money. Life insurance lump sums can be significant (it's not uncommon for people to be insured for hundreds of thousands or more), and this type of figure, as a cash lump sum, can be quite daunting for many people. This is particularly the case when they don't have the experience or financial literacy to deal with an amount like this. In this type of situation choosing what to do with the life insurance policies might be hard. There could be decisions to make about whether to pay off debt or invest in things like a child's education - and weighing up these choices is not always easy.
Some insurance policies have a built in "financial planning grant", which gives a small additional sum which the survivors can use to engage a Financial Planner to advise them. This type of feature can certainly help.
Another option is to use what is often called a "Family Protection Benefit" or "Survivors Income Benefit". This is an insurance option where, rather than receiving a single lump sum, the recipients will receive a regular monthly income from the life insurance company. This is set at the time the insurance policy is set up - and can be basically any amount, so the family can decide which amount would be needed and insure this figure. The number of years the policy is to pay out for can also be chosen - so people can choose a time period (for example 10, 15, 20 years etc) - that the ongoing income would be needed for.
This type of life insurance option is often used in conjunction with the more traditional insurance lump sum. In this way the lump sum can be used to clear debt such as the mortgage, while the Family Protection Benefit can provide the family with an ongoing income.
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