Last week, I blogged about a term insurance that pays out benefits monthly instead of a lump sum. The benefits of such a regular-payout insurance are discussed there, but I will explore further one of the benefits mentioned which is to safeguard the beneficiaries from unwittingly investing the lump sum payout into some risky investments to stretch the duration which the money could last. When the family suddenly receives a large sum of money from insurance, it is also possible that they might be surrounded by friends and relatives who will have no lack of ideas on how to stretch the money. Considering the typical family in which the spouse might not be financially savvy, the parents are old and the children are young, they might not be able to reject risky suggestions. Hence, from this perspective, even a person who has saved enough money and do not actually need insurance could do with a regular-payout insurance, if his family members are not financially savvy to manage the wealth that he will leave behind. A regular-payout insurance provides greater assurance of the amount of money that could be spent monthly as well as how long the money could last. Having said that, this is not the only way of achieving this. The other way is to set up an irrevocable trust that pays out a pre-determined sum of money to the beneficiaries regularly, but I have not set up one and hence not familiar with it.
While a regular-payout insurance has merits, there is an undesirable side effect, which is the beneficiaries will be constantly reminded of the passing of the policy-holder with the monthly receipt of the payout. One suggestion to improve this is to use a "charitable" foundation to pay out the money instead of the insurer. The foundation could provide a disguise for the payouts by claiming that the policy-holder has been a good person helping others in need and hence the foundation is willing to support the family through monthly payouts for a fixed number of years. Only with the last payout would it be finally revealed that the regular payouts are not charitable payouts but a result of the policy-holder's foresight to provide for his family long after his passing.
There is also a need to disguise the insurance policy in case the family finds it and files a claim with the insurer, only to be told that it is a regular-payout insurance policy. The disguise would be to add on a small lump sum payout so that the family would go away thinking it is a traditional lump sum payout insurance policy. The small lump sum payout has financial benefits as well, which helps to pay for unexpected immediate expenses. You can refer to Preference for Regular Payout Insurance for some of the cases in which a lump sum payout is useful.
With all these disguises, the family is probably not aware of the existence of this regular-payout insurance policy. Hence, there is a need to ensure that the insurer will live up fully to its commitment to pay out the benefits for the agreed period. This is where the independent "charitable" foundation could play a role. The insurance policy could include the foundation as a nominal beneficiary of the policy and the foundation could monitor to ensure that the insurer fulfils its commitment.
This is what I think will make the ideal insurance. It will probably cost a bit more, with the inclusion of the independent "charitable" foudation. However, I think it will be worth the cost. I hope insurers will take up the challenge!
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I like the way u think through these non financial issues. All these are real concerns and having one lump sum of money to a person who doesn't know how to handle it might actually do more harm than good.
ReplyDeleteThks. I've realised that sometimes the best solution might not be the best technically, but the one that takes into consideration the non-technical side of the equation.
DeleteI tend to think the lump sum payment is more apt as it addresses possible needs that are of quantums beyond that of a monthly payout.
ReplyDeleteIf you don't mind, pls share what are your considerations. Thks.
DeleteI guess I am concerned if the insured passes away with outstanding debts that require sums that are beyond what the monthly payouts can cover.
ReplyDeleteOK. In that case, a lump sum payout will be useful to settle the debts. Generally, assets (including payouts from insurance) should match liabilities in terms of both amount and timing.
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