If your spouse dies and you are the beneficiary of his or her life insurance policy, you can usually accept the life insurance proceeds in one of three ways:
- in a lump sum,
- in fixed payments over a specified period of time, or
- in an annuity you establish that makes regular payments to you for the rest of your life.
Lump-sum life insurance death benefit- receiving all the money at once- are generally appropriate for small policies, or for those beneficiaries who are capable of investing wisely, or who can rely on competent investment advisers. Lump-sum payouts occur automatically when insurance proceeds are payable into a trust.
If you don't need all the money right away or don't want to worry about investing it, you may choose to take the benefits in fixed payments for a specified number of years, such as 10 or 20. Although life insurance companies don't give you a very good deal (i.e. very low interest on the payments). Or, you may want to annuitize the payments to guarantee monthly or annual payments to you for life. The last two alternatives make sense if you want the security of a steady income but make sure you compare these offers to your other investment alternatives.
If you are the designated beneficiary of the life policy, you needn't wait long to receive the death benefit. Just file any necessary life insurance claims as quickly as possible to collect on life insurance. No waiting period is required. Life insurance companies usually pay routine death benefits within weeks.
The life insurance death benefit will add to the estate value of your spouse if he owned the policy. However, it bypasses probate since you're the beneficiary and not him.
The life insurance proceeds would only go through probate if no one was named beneficiary or the estate was named. In this case the life insurance company would issue the check to the probate court. The probate process is long. Eventually the court will distribute the proceeds of the estate after probate and attorney fees are paid. Only then will it distribute the remainder according to the will of the deceased or by the laws of intestacy of the state if there was no will.
Taking the payout in fixed installments-- perhaps monthly or quarterly-may be a reasonable approach. You can have the insurance company distribute the proceeds and interest in regular installments over a fixed period of time until the money is used up. If you have not received the entire payment by the time you die, the unpaid balance will be paid to either your estate or a beneficiary you choose.
You may also ask the insurer to make fixed payments to you of only the interest that the death benefit proceeds generate. You can leave the principal to your estate, or designate a beneficiary to receive it when you die.