What you can do to help your family manage money after death

Dev Ashish

Assuming you'll die tomorrow, here are a few questions that you should have answers to.

Q. Have you made enough arrangements for your family’s financial well being after you?

“Yes. I already have a good term life insurance plan.”

Q. But can you be sure that the family will properly manage the insurance money they get (after you)?

Most people will be worried about this thought.

Some will even shrug off saying that they can only take responsibility until they are alive and not after they die and that is true to an extent. But as well-wishers of our families, most people would pray that in (horrible) case of their sudden death, the family manages the insurance claim money properly.

After the death of a person, there are two risks for dependents:

1. Not enough money for family
2. Mismanagement of money family gets/has

The first risk is easily covered if you buy proper life insurance.

It’s the second risk that demands attention

But first…

Does your Family know about your investments & insurance?

Is your family aware of your life insurance policies? Do they even know that for several years, you have been paying premiums to protect them after you?

Sadly unless they know that you have a life insurance policy, they won't be able to make a claim

Make sure you make a small list that has the following details and share it with your family:

1. All your insurance policies (with policy numbers, dates, premium, sum assured, etc.)
2. Contact (telephone numbers, address of insurance companies) needed to make a claim

• Documents required for making the claim.

This list will ensure that your effort to protect your family don’t go to waste incase you are not around.

Next up…

Are your dependents financially literate enough to know what’s best for them?

If they are financially savvy, they will know how to use the insurance money. But if they aren’t, chances are that they will mismanage it (unknowingly) and end up in financial trouble.

Once you know about your dependent’s financial knowledge, you should take a call as to how the money from insurance claim should be paid to them?

Confused?

Don’t be.

When someone buys life insurance (term plan), the standard practice in case of death of the policyholder is that the policy pays out death benefit as a lump sum. For example, if you take Rs 1 crore pure term plan and die, your nominee will be paid Rs 1 crore in lump sum.

However, as explained earlier, not all nominees will properly manage the large money they suddenly receive. In a single-income family, the surviving partner might find it extremely difficult to properly utilize the money. More so with a lot of conflicting advice being bombarded on him/her from all sides.

Is there a solution?

Yes.

Many insurance companies now give the option of having the amount paid in 2 ways:

• One part lump sum
• Other as regular monthly payout for several years

For example - On death, such a policy of Rs 1 crore will pay:

• Rs 40 lakh as one-time lumpsum payout on death
• Rs 50,000 every month for next 10 years (10x12x50,000=Rs 60 lakh)

So a decent amount is paid as lump sum (can be used to close any loans or to help stabilize the family initially). The remaining amount paid monthly can act as a regular income source for the family.

Mathematically, it still makes sense to take the full lumpsum option and deploy it efficiently. But practically, it comes down to how your family will manage it and whether others will wrongly influence them and result in wrong investments. You never know. Right?

So depending on how your assessment of your family’s financial literacy quotient, pick the suitable option:

• If nominees are well versed in personal finance, then go for full lumpsum payout in term plans.
• If you think nominees will be unable to properly manage it, then go for the staggered-payout (monthly income) term plans.
• Or you can even take a hybrid approach.

It’s true that you cannot control everything. But if some foresight can help better prepare your family in your absence, then maybe the effort is worth it.

(The author is the founder of StableInvestor.com.)