WASHINGTON — Newly widowed spouses face a number of financially significant decisions, often very soon after the loss of their life partner. In the midst of grieving, they are presented with a number of choices and looming deadlines.
Even when they are experienced at managing their finances or investing their money, they may be called upon to settle the estate of their spouse. Very few of us will go through this process more than once, so it’s helpful to know what this uncharted territory requires.
Here are some of the early decisions that may be required, and a few options to consider when answering these questions.
1. Who will settle the estate?
When someone passes away, there is an estate administration process which determines the decedent’s assets and debts, as well as whether estate taxes are due. Once these calculations are made, then any remaining assets can be distributed to heirs according to the will, or per state law if no will exists.
When a will exists, it typically specifies the decedent’s choice of an estate executor. As the chief administrator, the executor is legally responsible for all stages of settling the estate.
If the deceased did not have a will, or if their will did not specifically name an executor, then state laws will dictate who will be appointed to help settle the estate. This person is referred to as either the administrator or personal representative. Administration proceedings vary by state, but if you want to be appointed administrator of a loved one’s estate, you’ll typically need to file a petition in court first.
One thing to consider when answering this question is whether there are state laws that require an estate to be opened for settlement within a certain period of time. There also may be rules setting a cutoff date after which no one can claim assets from the decedent’s estate. For these reasons it’s important that filing to be acknowledged as the executor, or to be appointed as administrator, is completed in a timely manner when someone passes away.
2. What options do I have when receiving life insurance proceeds?
Life insurance can potentially reduce the financial burdens should your spouse die unexpectedly.
It’s common for beneficiaries to elect a lump sum payout from the policy, yet in reality, there are several other options that may be appropriate depending on the situation. Deciding which option to choose is one of the first major decisions a widowed spouse must make. With several options to choose from, the “right decision” may not be clear. Consider these details for typical life insurance settlement options before making a final decision:
Lump sum: Receiving one lump sum payout provides the most immediate benefit. If proceeds are meant to pay significant estate taxes, then this option is a logical choice. One thing to keep in mind is that if a substantial amount of money will be paid out to someone unaccustomed to managing large sums of money, there are installment settlement options that may be a better way to distribute funds. That way, the intended financial support continues over a longer period of time.
Fixed income: If you prefer to receive income for a period of time, then you may want to choose this option, which allows the benefit, plus interest, to be paid out in specific amounts until the policy proceeds are fully distributed. This option may be useful to bridge a gap in your income stream. One example may be a widow who will receive sufficient pension or Social Security income but loses her spouse several years before that income stream begins.
Interest only income: This option provides the lowest immediate benefit. In this case, the insurance company holds the death benefit and only pays out the contracted stipulated amount of interest on the funds. There is some flexibility with this option as the beneficiary has the opportunity to request a portion, or all of the proceeds, if needed. This option may be useful if the policy is intended to pay for a particular expense occurring in the future such as paying for college education for a child not yet near college age.
Fixed period option: This option provides another way to receive life insurance settlement benefits as regular income. The beneficiary receives an equal amount of income for a period of time (i.e., 10 years). You’ll want to confirm that the initial beneficiary can designate another person to receive any remaining benefits should they pass away before the end of the payment period.
Life income: Insurance companies also offer an option which can be thought of as a type of annuity for the beneficiary. The payout amount is based on a calculation that takes the total death benefit and applies mortality factors to determine the income amount. That payment is provided to the beneficiary only for their lifetime. One example where this choice may be preferable is if you have a relatively young and healthy beneficiary who doesn’t need income and if there are no children or other beneficiaries who could benefit from more certainty in the ultimate payout of the full death benefit amount.
Joint and survivor life annuity: This option pays the policy proceeds over a period of time so long as two named beneficiaries are alive. The payout continues until the last beneficiary has died. One consideration in choosing this option is that if there are untimely deaths, or if the beneficiaries are already advanced in age, the family could end up not receiving the full economic benefit of the proceeds.
Deciding how to take death benefit proceeds should also take into account the potential tax implications of the desired option. It’s best to make the final decision after considering your income and asset composition and in the context of your overall plan. Typically, benefits received as a lump sum are not taxed but options that include payment of interest may have a tax reporting and payment component.
Insurance companies can provide specific illustrations showing payout numbers for the various options. It’s a good idea to request a formal illustration if you want to compare income numbers before making a final decision.
3. Where should I live?
One of the more difficult decisions a widowed spouse has to make is whether to continue living in their current residence. Like many advisers, I typically suggest someone pause for a period of time before making a major life transition. That said, sometimes for financial or safety reasons, a more immediate decision is necessary. We often see this occur if the home has a substantial mortgage being paid by a pension or other payment that ceases as a result of the death of the spouse. For older widows and widowers, it may be necessary to move if home maintenance is too much for them to handle.
The best way to reach an appropriate housing decision is to first take the time to review the financial reality of staying in the home. If finances support staying there, then begin to consider the quality of life issues of staying versus exploring other options. Financial professionals such as a CPA or financial adviser can weigh in on the potential tax implications of a sale, while professional care managers are equipped to help you understand nursing care or assisted living alternatives.
For couples of any age, having a plan in place is the best way to prepare for the decisions ahead of a death. We encourage you to use our Her Wealth In Case Of Emergency Checklist to help you and your spouse identify and share critical information you will need to know should one of you pass away.
In part 2, we will explore questions about Social Security, investing and the daily decisions of managing finances that widowed spouses face.