Spendthrift clause life insurance is a type of life insurance that is offered to people who are at high risk for life insurance. They can state in the policy that they do not want their heirs to be able to collect on the policy, or at least not easily. The benefits of this type of insurance include an affordable premium rate and taxation of the proceeds.
If you are worried about your beneficiaries claiming your life insurance payout and spending it on something unproductive, spendthrift clause life insurance could be right for you!
What is Spendthrift clause life insurance?
Spendthrift clause life insurance is a type of life insurance that is offered to people who are at high risk for life insurance. They can state in the policy that they do not want their heirs to be able to collect on the policy, or at least not easily. The benefits of this type of insurance include an affordable premium rate and taxation of the proceeds. In a spendthrift clause life insurance policy, the policyholder (the payer of the life insurance) does not want to take the money that is his for future use. He wants the entire policy proceeds to go to the beneficiary, but she doesn’t want it.
Spendthrift clause policies are often used when there is some type of problem with the beneficiary that makes it hard or impossible for her to collect while alive. Sometimes they’re used because someone believes they don’t have enough money to keep their policy, even after collecting on it before they died due to inheritance tax problems. Or they may not have enough money in their own life insurance program and need an inexpensive way to top off what they already had.
How does it work?
If you’re worried about your beneficiaries claiming your life insurance payout and spending it on something unproductive, spendthrift clause life insurance could be right for you! Let’s explore this type of insurance further by looking at what it entails.
What happens after you die?
When you die, your beneficiaries can claim the life insurance policy proceeds. After paying their bills and living expenses, they’ll use the money to buy a house or start a business. They can take their time deciding what to do with the money. Or they may want to wait until they have enough of a nest egg together before deciding what to do with the money. If you didn’t leave enough in your estate to cover all of your debts, then each beneficiary will have a different amount of time to pay them off before the unpaid bills and debts go into collections.
Benefits
There are many benefits to spendthrift clause life insurance, but the main benefit is a lower premium rate. This type of insurance is sometimes called “clean” life insurance because it comes with a small amount of risk that your beneficiary won’t be able to collect on the payout. In addition, it’s also very affordable and cheap. You could buy it as part of your existing life insurance policy and often get a slightly lower rate, or you can get it on its own for a very small and affordable premium. The proceeds from this type of life insurance are usually taxed at the beneficiary’s rate instead of your higher rate, and beneficiaries can’t claim the proceeds for 20 years.
The reason why spendthrift clause life insurance is less expensive is that you’re more likely to die. Early than beneficiaries who don’t have issues that make them hard to insure against. This makes the chances of them collecting much smaller since they wouldn’t be able to collect the premium. Even if they lived for several decades.
Insurance company
All policies are issued by a licensed agent or broker from a company. That is part of the National Association of Insurance Commissioners (NAIC) system. It’s also required for each state to have an Insurance Department that is part of the NAIC system. So companies must be licensed by these states as well.
Other types of spendthrift life insurance include:
Capped payouts
A capped payout is usually a low amount as compared to an uncapped payout. With an uncapped payout, the beneficiary can claim whatever amount they like, up to the policy limit. With a capped payout they will have to claim within a certain amount range. That is stated in the policy contract. Uncapped payouts are usually higher as compared to capped payouts.
The benefits of uncapped life insurance policies can go up to the maximum amount. You specify in the policy, but the limit is usually a small amount.
Split benefit
In this type of insurance, you choose an amount of coverage, up to the policy limits. And then your beneficiary gets a proportionate share of the benefits from that amount. For example, if the policy limits were $300,000, your beneficiary would get 30% or $60,000. Split benefit plans are used when there are other beneficiaries besides. Your spouse wants their own benefits paid by your insurance policy.
Split-dollar plans
This type of insurance policy has built-in returns on investment. It’s a special kind of investment tool that lets you use the money. That accumulates in the policy to pay off your existing debts. You can even buy an existing home with a split-dollar insurance plan.
Split-dollar life insurance policies
This type of policy is similar to a return of premium life insurance plan, except for two major differences. First, you must have a tax deduction within sixty days after the premiums are paid, unlike return on premium. Second, with the split-dollar plan, you can receive up to five years’ worth of returns on investment (ROP). Instead of only one year with a return of premium plan. This can vary by company.
Unfunded legal settlement policies
These are life insurance policies that are set up to pay for specific purposes. This is an unusual kind of life insurance, and it’s usually only used in certain cases. Unfunded settlement policies can be used to pay off judgments against the insured. Or for post-death obligations such as funeral bills, debts, and estate taxes. Another use is for criminal restitution. Where the principal amount is paid in installments until the criminal’s fine is completely paid up.
How do I get it?
If you want insurance that has few restrictions and doesn’t cost much. Talk with a licensed agent in your state who can help you compare plans. And determine if a spendthrift clause life insurance policy would be right for you. Remember that this type of life insurance is only available in states that regulate life insurance policies. So check with a licensed broker or financial advisor. From one of the life insurance companies that are part of the NAIC system.