By Zina Kumok
Life insurance payouts are usually talked about in terms of basic damage control. They allow beneficiaries to grieve without having to significantly alter their lifestyle — replacing the income of a breadwinner or important financial contributor as they get through a difficult period in their lives.
That’s an important function of any policy, but life insurance can also be used to build something new. Your family may no longer rely on your income to survive after you are gone, but that doesn’t mean you can’t contribute to their future well being and financial stability. By using your policy to establish a legacy for future generations, you can rest easy in the knowledge that your passing and legacy planning will open up opportunities for those you leave behind.
That’s what happened when Emily Guy Birken’s father passed away, leaving behind a $250,000 policy for his two daughters and their families.
How Life Insurance Created a Legacy
In 2013, Guy Birken’s father was diagnosed with neuroblastoma, a rare type of cancer with a low survival rate. He died six months later.
After his death, Guy Birken and her sister, who were beneficiaries of his life insurance policy, received claim payouts — $125,000 each. Her father was a financial planner who was always careful with money, and he spent his final months making sure his estate was in order.
When she received the money, Guy Birken spent a lot of time thinking about what to do with it. She wanted to use it for something her dad would have approved of instead of fun trips or material luxuries.
She ended up dividing the funds like this: $25,000 each to her two sons’ 529 accounts, $50,000 to her retirement account, $12,500 to charity and $12,500 to help pay for a move to Wisconsin in 2016. Her sister decided to follow suit, using a portion of her share for her daughter’s college fund.
Guy Birken said her father always emphasized the value of education. When she was growing up, he told his daughters to get into the best college possible and let him worry about paying for it.
“He always told us, ‘Don’t look at the right side of the menu, don’t look at the prices,’” she said.
Author of “End Financial Stress Now: Immediate Steps You Can Take to Improve Your Financial Outlook,” Guy Birken said her father’s gift has decreased some of the pressure she felt saving for her children’s college funds. She was saving $1500 a year for her first son before receiving the life insurance payout, and now she’s been able to decrease that amount to about $500 a year for each of her two kids.
Her sons are now 8 and 5, and Guy Birken said she tries to pass along the financial lessons her father taught her. One day she was looking at their 529 accounts while her sons were in the room.
“Some of this came from Grandpa Jim,’” she said.
How to Leave Behind Your Own Legacy
Guy Birken’s story is an example of how life insurance can create a legacy that spans multiple generations. Because her father planned ahead, his grandchildren can attend college anywhere they want – just like their mom did.
To create your own legacy, look at what kind of life insurance you currently have and who your beneficiaries are. You can decide to bequest your IRA and 401(k) accounts to your spouse and then designate your children as your life insurance beneficiaries. You can even name your grandchildren as beneficiaries, though for any beneficiaries who are currently minors you’ll want to name a custodian to remain in charge of the money until they turn 18.
Heirs usually don’t have to pay income tax on life insurance payouts, so it really can be a very effective way to pass on a financial legacy.
Talking to a financial adviser can also be a great way to plan your financial legacy and make sure your forethought will have a lasting impact.
If life insurance is something you’ve been debating, or meaning to check off your list, visit ladderlife.com to learn more.