Death Benefits: Exploring Life Insurance Choices

Life insurance is a way to provide financial security to your loved ones after you pass away. The death benefit is the amount of money paid out to your beneficiaries, and it can be used to cover expenses, replace lost income, or fulfil other financial goals. There are several types of death benefits, including level and increasing death benefits, and different payout options, such as lump-sum or installment payments. The size of the death benefit and the type of policy chosen will impact the cost of premiums. Understanding these choices can help individuals make informed decisions about their financial future and ensure their loved ones are taken care of.

How to choose a death benefit amount

When choosing a death benefit amount, it's important to consider your reasons for purchasing life insurance in the first place. Ask yourself: How much would I like to leave my loved ones? And how much can I afford to spend per month on the policy?

For instance, a young adult with no family to support might opt for a plan with a small death benefit—enough to pay off any outstanding debts and perhaps leave a small amount of money to someone. Conversely, a parent with children might choose a plan with a larger payout if they want to provide for their children's care and education.

The death benefit amount will directly impact your life insurance premiums. The larger the death benefit, the higher your premium. Other factors that influence your premium include the type of insurance, your age, gender, health, and whether you use nicotine.

There are two main types of death benefits: level and increasing. A level death benefit remains the same throughout the policy, whereas an increasing death benefit can grow over time, usually resulting in a higher premium.

If you're unsure how much life insurance you need, consider using an online life insurance calculator. These tools can help you determine how much income your loved ones would need to replace, any financial obligations you may leave behind, and final expenses such as funeral and burial costs.

It's also worth noting that you can designate each beneficiary as either revocable or irrevocable. Revocable beneficiaries can be changed relatively easily, while irrevocable beneficiaries require their consent to be removed or have their share changed.

How to file a death benefit claim

When a loved one passes away, filing a death benefit claim is likely the last thing on your mind. However, it is a necessary step to receive the benefits from their life insurance policy. Here is a detailed guide on how to file a death benefit claim:

Step 1: Identify the Insurance Company

Firstly, you need to identify which insurance company holds the policy of the deceased. Knowing the name of the insurance company is crucial for initiating the claim process. You can find this information by checking the insurance documents of the deceased or by contacting their insurance agent.

Step 2: Gather Required Documents

The next step is to gather the necessary documents for the claim. The key document required is the death certificate of the insured. In most cases, a certified copy of the death certificate needs to be provided along with the claim form. You can obtain this document from the funeral home, the medical professional who confirmed the death, or the vital records office.

Step 3: Obtain Claim Forms

You will then need to obtain the claim forms from the insurance company. These can often be downloaded from the company's website or requested directly from the insurer. The required forms may vary depending on the insurance company and the type of policy. For example, the US Department of Veterans Affairs requires different forms for Veterans' Mortgage Life Insurance (VMLI) and Servicemembers' Group Life Insurance (SGLI).

Step 4: Fill Out and Submit Forms

After obtaining the necessary forms, fill them out accurately and completely. Provide all the required information, including the insured's full name, social security number, date of death, and cause of death. You may also need to include additional documentation, such as proof of your relationship to the insured or your identity as the beneficiary. Submit the completed forms and supporting documents to the insurance company, following their specified submission process.

Step 5: Follow Up on the Claim

Once you have filed the claim, the insurance company will process it. There is usually no time limit for submitting a life insurance claim, but it is advisable to file it as soon as possible to receive the death benefit promptly. You can follow up with the insurance company to check on the status of your claim if needed.

Additional Considerations:

• Beneficiary Status: Ensure that you are a designated beneficiary on the policy. The policyholder may have changed beneficiaries without informing previous beneficiaries.
• Policy Status: Check that the policy was active and had not lapsed due to non-payment of premiums. Policies that have expired or lapsed may not provide death benefits.
• Time Limits: While there is generally no time limit for filing a claim, be mindful of any grace periods or time restrictions mentioned in the policy.
• Fraud and Misrepresentation: Be aware that claims may be denied if fraud or misrepresentation was involved in the policy application. This is particularly relevant within the first two years of the policy, known as the contestability period.
• Suicide Clause: Most life insurance policies have a suicide clause, excluding death benefits if the insured passes away due to suicide within the first two years of the policy.

How death benefits are paid out

Death benefits are paid out to the beneficiary of a life insurance policy when the insured person passes away. The death benefit is the defining feature of a life insurance policy and is the amount of money paid out to the beneficiary. When someone buys a life insurance policy, they choose a death benefit amount and name their beneficiary or beneficiaries.

Types of death benefits

There are two main types of death benefits: a level death benefit and an increasing death benefit. A level death benefit remains the same regardless of how long the policy has been in force, whereas an increasing death benefit can grow over time, but this may result in higher insurance costs.

How to claim a death benefit

To receive a death benefit, the beneficiary must file a claim with the insurance company. This usually involves submitting a death claim form, along with a certified copy of the death certificate. The insurance company will then review the claim and may pay out the benefit, deny the claim, or request additional information. Most insurance companies pay out death benefits within 30 to 60 days of the date the claim was filed.

Payout options

There are several options for receiving a death benefit payout:

• Lump-sum payment: This is the most common option, where the entire death benefit is paid at once.
• Installment payments: The death benefit is paid out in installments over a specified period.
• Annuity: The death benefit is converted into an annuity, which makes regular payments over a certain period or for the lifetime of the beneficiary.
• Retained asset account: The insurance company retains the death benefit but gives the beneficiary check-writing privileges to access the payout.

Who can be a beneficiary

Life insurance beneficiaries are the people or organisations chosen to receive the death benefit from a policy. There are two types of beneficiaries: primary and contingent.

Almost anyone can be a life insurance beneficiary, including people, organisations, and trusts. Here are some common examples:

• A person, like a spouse
• Multiple people, like children
• A charitable organisation
• A legal entity, like a company

Some insurers place limits on how many beneficiaries can be named. If your policy has a limit, be selective when compiling your list.

The beneficiaries chosen when purchasing a policy must have an "insurable interest" in the life of the insured. This means they have more to lose than gain by the insured's death, whether financial or otherwise.

Primary vs. Contingent Beneficiaries

The primary beneficiary is the first in line to receive the death benefit from a life insurance policy. In the event that the primary beneficiary dies before or at the same time as the insured, most policies allow for at least one backup beneficiary, called a "secondary" or "contingent" beneficiary. If the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit.

Special Considerations

When naming a beneficiary, it is important to think through how to provide for a minor. While many people buy life insurance to provide for their children, the law prohibits anyone from receiving a life insurance payout if they are not the age of majority (18 or 21, depending on the state). In such cases, it is best to name a highly trustworthy adult custodian as the beneficiary or to work with an attorney to set up a trust to manage and distribute the funds.

It is also important to consult with an attorney if the insured has a disabled or special needs child. A trust can be set up to benefit the child without impacting their eligibility for certain government programs like Medicaid.

Finally, it is generally recommended to avoid naming one's estate as a beneficiary, as this can lead to a lengthy and costly legal process known as probate. Instead, it is preferable to name a person, people, or organisation as the beneficiary.

How beneficiaries can use the money

Life insurance death benefits can be used by beneficiaries in a variety of ways, and there are no restrictions on how the money can be spent. Here are some common ways beneficiaries can use the money:

Paying Off a Mortgage

Eliminating a major debt like a mortgage can provide financial security and peace of mind for beneficiaries. By using the death benefit to pay off the remaining mortgage balance, they can reduce their monthly expenses and have one less financial burden to worry about.

Education Expenses

The death benefit can be used to fund a child's or grandchild's education. This can include saving for college tuition, textbooks, and other related expenses. By setting aside a portion of the death benefit for education, beneficiaries can ensure that the next generation has access to quality education and a strong start in life.

Paying Down Consumer Debt

Beneficiaries can also use the money to reduce or eliminate consumer debt, such as credit card debt or other personal loans. This can help alleviate financial burdens and improve their overall financial health.

Retirement Savings

The death benefit can be invested in retirement accounts to help secure a comfortable retirement for the beneficiary. This can include contributing to traditional IRAs, Roth IRAs, or other retirement savings vehicles.

Creating an Emergency Fund

Establishing an emergency fund with a portion of the death benefit can provide beneficiaries with a financial safety net for unexpected expenses. This can include covering medical bills, car repairs, or other unforeseen costs.

Daily Living Expenses

Beneficiaries can also use the death benefit to cover their daily living expenses, such as rent, groceries, utility bills, and other essential costs. This can be especially helpful if the beneficiary is facing financial difficulties or is no longer able to work.

Business Expenses

If the beneficiary owns a business, they can use the death benefit to invest in their business, cover operational costs, or ensure business continuity. This can include purchasing new equipment, hiring additional staff, or expanding their business offerings.

Charitable Donations

Beneficiaries can also choose to donate a portion of the death benefit to charities or non-profit organizations. This can be a way to honour the deceased's memory and support causes that were important to them.

It's important to note that beneficiaries have the freedom to choose how they want to use the money based on their financial needs and goals. They can seek guidance from financial advisors or tax professionals to make informed decisions and maximize the impact of the death benefit.

Frequently asked questions