The time it takes to receive life insurance after death of a loved one generally ranges from two weeks to two months.1 The type of life insurance policy and the life insurance company will likely factor in the timing. Given this variability, it’s wise to have a plan in place — before your loved one passes away — for how you will use the life insurance payout.
There are many options for using a life insurance payout and the right ones for you will be a personal choice. But there are some opportunities that are more practical than others. For instance, using the proceeds to pay the decedent’s estate tax may be the most sensible choice, especially if it’s a large estate. Even if no estate tax is owed, there are other options for putting life insurance proceeds to good use.
Here are five considerations for using the life insurance payout that can be productive.
5 options for using a life insurance payout
- Paying income and estate taxes. Life insurance proceeds can be used to cover any income or estate taxes that might be due upon the policyholder’s death, to help ensure that the estate doesn’t have to be liquidated to pay these taxes. Check ahead to see if the policyholder’s residence is in a state that imposes an estate or inheritance tax — there are 17 states that do.2 To help avoid significant estate taxes after their death, the policyholder while living could set up an irrevocable life insurance trust (ILIT) to govern the management and distribution of their life insurance policy. Life insurance held in an ILIT is not included in the insured’s gross estate. However, if the insured owned the policy in their own name, then the value (generally the death benefit) of the policy would be subject to estate tax. Find out more about ILITs here.
- Funeral home expenses. The average cost of a funeral is $8,300, and the average cost of cremation is $6,280.3 If you don’t have the funds at hand to pay for these expenses, you can sign an assignment form, provided by the life insurance company or the funeral home, that allows the funeral home to be paid directly from your life insurance payout. Any remaining balance will be given back to you. You might also consider funding the travel expenses of family members or loved ones who wish to attend a funeral, memorial, or celebration of life.
- Donating to charity. Charitable giving can be quite fulfilling, while also potentially helping minimize the impact of taxes. There are many ways to give, such as donor advised funds (DAFs) and charitable remainder trusts — it’s a matter of choosing which option would best fit your personal situation. Read more about charitable giving here.
- Preserving generational wealth. Depending on your own age, family, and financial circumstances, you may want to build and preserve your family’s wealth for many more years. The death benefit can be used to fund trusts, pay for education, or invest in assets that will benefit future generations. Whether you’re a baby boomer (born from 1946 to 1964) or millennial (born from 1981 to 1996), you might be contemplating your own estate plan and how you might transfer your assets. To learn more about wealth transfer strategies, go here.
- Paying off debt and expenses. If you have any high-interest debts, such as credit card balances, consider paying them off to help reduce your financial burden. Maybe there are medical bills or other expenses related to your loved one’s passing that need to be paid. Having a mortgage payment every month may be weighing on you and you’d like to pay off your mortgage. Before you make any major decisions, compare your good debt against your bad debt to develop a plan and apply the money wisely.
Make a plan
Creating a plan for a life insurance payout while the policyholder is still living can help reduce the stress of having to make decisions in an emotional time. Because there are many options for how a beneficiary can use a life insurance payout productively, and the right ones will depend on your financial situation and tax considerations, hiring a financial advisor to help with successfully managing and building your wealth may be your best option.
At Mercer Advisors, our advisors specialize in guiding families through life-changing events and preparing the next generation for financial success by preserving family wealth. We offer a comprehensive wealth management solution that integrates financial planning, investment management, tax, estate, insurance, and more, all managed by a single team. When you’re ready to make a plan for life insurance after death of a loved one, let’s talk.
1. “How Quickly Do You Get a Life Insurance Payout?”, Policygenius, Aug. 24, 2023.
2. “States That Won’t Tax Your Estate When You Die,” SmartAsset, May 5, 2024.
3.“2023 NFDA General Price List Study Shows Inflation Increasing Faster than the Cost of a Funeral,” National Funeral Directors Association, Dec. 8, 2023.
