What Is A Life Insurance Death Benefit?

    What Is A Life Insurance Death Benefit: A Guide To Financial Security For Your Loved Ones

    While various life insurance policies will differ in features and riders, one component remains constant – the death benefit. Who receives this death benefit (and how much they receive) is entirely up to you. 

    If you're applying for a life insurance policy for the first time, this guide will tell you all you need to know about death benefits.

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    Defining A Life Insurance Benefit

    A life insurance death benefit is the amount of money paid out to beneficiaries if the policyholder dies while the contract is in force. This amount varies depending on the type of policy you get and how much coverage you’re eligible for.

    Fortunately, because a death benefit is not part of your gross income, it isn’t subject to income tax. In most cases, beneficiaries receive it as a tax-free lump sum. However, the policyholder may request for the money to be distributed in another way, like an annuity. 

    Who Receives The Death Benefit?

    When you die, your beneficiary receives the life insurance death benefit. Most married people name their spouses as their beneficiaries, although you can choose another family member, trust, or even a charitable organization. In some cases, you may be able to select more than one beneficiary, assigning a percentage of the death benefit proceeds to each recipient.

    There are two types of beneficiaries.

    • Revocable beneficiaries: If you feel you might change your mind about who receives the death benefit in the future, you can assign revocable beneficiaries. Unless you live with your revocable beneficiary in a common property state, you don't need their consent to replace or terminate them as a beneficiary.
    • Irrevocable beneficiaries: Irrevocable beneficiaries must agree to any changes if you decide to replace them.

    What Is A Death Benefit For?

    Life insurance death benefits can serve varying purposes depending on your financial strategy. Popular uses of the death benefit include the following.

    Final Expenses

    End-of-life expenses include medical bills, cremation or memorial services, and a funeral. If necessary, it can also cover estate settlement costs and other unpaid dues.

    Paying Off Debts

    Suppose you had outstanding debts like a mortgage, credit cards, or student loans. If so, you can relieve your family of the financial burden of paying these debts through life insurance death benefits.

    Providing Medical Care

    If another loved one is suffering from a chronic medical condition, a death benefit payout can cover their rising care expenses.

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    Making A Charitable Contribution

    You can make charitable donations to your chosen advocacy even after death. Simply designate your selected non-profit organization as a beneficiary.

    How Much Are Life Insurance Payouts?

    On an insurance contract, this coverage is listed as the policy’s face amount. For instance, $500,000 life insurance policies will pay $500,000 to your beneficiaries. However, this value can change depending on the circumstances of your death or if your loan is from your policy.

    Higher death benefits usually come with higher premiums. It’s essential to get the right amount of coverage – enough to achieve your financial goals and secure your family – so you don’t have to pay excessive rates.

    How Death Benefits Are Distributed

    There are two primary payout options for whole life insurance benefits. Here’s a breakdown of each.

    Lump Sum

    A life insurance company will typically distribute death benefits as a single amount. Beneficiaries typically receive the payment as a check or direct deposit.

    To receive the benefit, beneficiaries must first file a claim with the policyholder's insurance agent and submit a copy of the death certificate. The insurance company will review the death claim before releasing the money. An insurer can choose not to release the money if: 

    • You lied on your application.
    • You died as a consequence of your illegal actions (such as driving drunk).
    • You died as a consequence of risky activity (such as skydiving or race car driving).
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    Annuity

    If you want to make it easier for your beneficiaries to budget the payout, you can set it up as an annuity. Beneficiaries will receive the money annually, biannually, quarterly, or monthly until the amount runs out.

    Timeline

    Contrary to popular belief, beneficiaries don't receive the money automatically. First, they must file a life insurance claim. Insurance companies take up to 30 days for a review. During this period, the agent can distribute the benefits, deny the claim, ask questions, or request more information.

    The time frame for paying out on insurance products depends on the type of life insurance contract you have. A whole life insurance policy might release the insured money in as quickly as 24 hours, whereas a term life insurance policy can take 30 to 60 days.

    Contestability Period

    A life insurance company can withhold death benefits during the contestability period if the death occurs under suspicious circumstances. This period lasts for two years after the policy becomes active.

    Are Death Benefits Tax-Free?

    The insured money isn't subject to income tax, except under specific circumstances. For example, you may have to pay taxes if: 

    • It causes your estate to exceed the tax threshold.
    • You sell your policy to someone else.
    • You surrender your policy.
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    In Conclusion

    A death benefit allows you to cover final expenses and secure your loved ones financially even after your death. How much coverage you need depends on your financial goals and what you want it to be used for.

    Do you want to learn more about how death benefits work? Contact Wesley Insurance, LLC for more information!

    Written By Cameron McDowell
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