Although not everyone has life insurance, all life insurance policies have death benefits. But what exactly is a death benefit, and how do death benefits work?
What is a death benefit?
A death benefit is money paid to a beneficiary when a life insurance policyholder passes away. Death benefits are also paid to the beneficiaries of annuities and pensions when the annuitant dies with a survivor benefit.
Who can be a life insurance beneficiary?
Life insurance beneficiaries are often spouses or children. Although, if the children are minors, the benefits should go into a trust managed by their guardian. A beneficiary could also be a life partner, sibling, parent, business or nearly anyone the policyholder chooses. You can choose multiple beneficiaries to each receive a share of the death benefit, too.
Generally, the beneficiary is someone who would be impacted financially by the policyholder’s death. Moreover, a beneficiary can be revocable or irrevocable, making it easier or harder to remove them from a policy.
When and how is a death benefit paid out?
When someone passes away, death benefits are not paid automatically. That’s partly because the life insurance company may not know about the policyholder’s passing. Usually, the insurer will pay a death benefit after the beneficiary completes a claim form and provides a certified copy of the policyholder’s death certificate.
Death benefits are typically paid to the beneficiary, tax-free, in one lump sum. However, the policyholder can instead set up an annuity, which may be subject to income or capital gains taxes, or arrange for payments to be made in installments. But if the policyholder took an accelerated death benefit, the beneficiary’s payout could be reduced.
If you have questions about buying life insurance or about your existing life insurance policy, contact us anytime.