Unlike other insurance products, a life insurance pay-out is completely unrestricted and can be spent however the recipient wants. The only time this isn’t the case, is when the life insurance policy has been placed in a Trust which stipulates how the money is spent. A Will can also influence this.
Many people with an outstanding mortgage want their life insurance proceeds to pay it off, which can provide a huge sense of relief after losing somebody who significantly contributed to the household income. Paying off a mortgage when somebody passes away gives those left behind options: the option to leave a job or go part-time to look after children, the option to stay in the family home without the need to sell it, or the option to have one less financial commitment each month.
If your estate is worth over a certain amount, then it is possible your loved ones will be liable to pay a significant inheritance tax bill. To pay inheritance tax, many people are forced to sell the home they have recently inherited to release the equity. To avoid this, some people take out a life insurance amount equal to the expected taxation.
When somebody dies unexpectedly those left behind often have to scramble to get the funds for a funeral, which can easily go into the thousands. Proceeds from life insurance are often used either to pay for a funeral and end-of-life costs, or reimburse any borrowed money from family and friends.
Life insurance can be used to provide financial gifts to your loved ones (potentially tax-free, depending on how and when the gift is left), perhaps with the intention of being used for university tuition, house deposits, a new business or weddings. Some people who take out life insurance want their family to enjoy the money, such as taking once-in-a-lifetime holidays to make the best of a terrible situation.
It’s important to consider what your family’s quality of life would look like if you passed away. Life insurance proceeds can also be used as a simple replacement for your income over a set number of years, used to support everyday living costs such as food, bills and clothes.