Life insurance comes in many shapes and sizes, but if there’s one thing that all policies have in common, it’s the payout, frequently referred to as the death benefit. Whether you decide to opt for the simplicity of term life insurance or the extra security of whole or universal life coverage, the overarching purpose of a life insurance policy is to provide a financial safety net to your loved ones in the event of your passing. Essentially, that safety net is the payout.
Throughout my years of practice as an independent insurance broker in Franklin, TN, I’ve received a fair deal of questions about life insurance death benefits. Whether it’s their intrinsically grim nature or the wild prospect of receiving a $500,000 payout, there’s something about death benefits that seems to peak people’s interest. In this article, I decided to go over the most important aspects of a life insurance death benefit (settlement) so that whether you already have a policy or are just starting to consider buying one, you know what questions to ask and what to expect from your carrier.
Understanding Life Insurance Death Benefits
Unlike home and auto insurance policies, where the actual payouts are calculated after an insured event takes place, life insurance policies work the other way around: everything revolves around the death benefit. By letting your carrier know how much coverage you need, they can calculate your premiums and give you a personalized insurance quote. It’s important to note that only part of your premiums will go toward the death benefit, as they also need to finance your broker’s commission and, if you opted for permanent coverage, your policy’s cash value.
Types of Life Insurance Death Benefit Settlement Options
While a lump-sum death benefit is probably the most popular form of payout, there are several other settlement options that you or your beneficiaries can take into consideration. These include:
- Life income, which spreads the payout across your beneficiaries’ life span, ensuring that they’ll have a dependable source of income for as long as they live. Practically, your beneficiaries will have the chance to turn your life insurance policy into an annuity. How it works is that your carrier will calculate a recurrent payment based on the number of beneficiaries, their age and health condition, and the policy’s death benefit amount. The insurance company will keep whatever is left of the death benefit after your beneficiaries pass away.
- Life income with period certain, which follows the same principle as the life income payout in that it’s some sort of annuity, but with a key difference: instead of recurrent payments for life, your beneficiaries get to choose over how many years they want to spread the installments. The advantage is that even if they pass away during that time, the remaining payments will be awarded to other beneficiaries of their choosing, such as their spouse or children.
- Specific income, which breaks the death benefit into multiple installments that are awarded to your beneficiaries as time passes. This type of settlement is very similar to life income with period certain, but the main difference is that you – the insured – get to choose the payment format, and not your beneficiary.
- Retained asset account, which will turn the death benefit into a checking account run by your insurance carrier. Your beneficiaries will then access the funds as needed, with the account accruing interest over time.
Do You Pay Taxes on Life Insurance Death Benefits?
Not in and of themselves, but the cash value and accumulated interest are. See my latest post about whether life insurance can be tax-deductible for more information on this subject.
How to Access the Life Insurance Death Benefit
The process behind gaining access to the death benefit is pretty straightforward. It all starts with filing an insurance claim with the carrier. To substantiate the claim, the beneficiary will need to provide a certified copy of the insured’s death certificate. In order to speed up the whole process, it would also be very helpful to attach a copy of the life insurance policy to the claim, for identification purposes.
Once the company receives the request, it will take between 30 and 60 days to process the payment. If it takes longer, it’s probably because of the following reasons:
- The contestability period. If the insured passed away during the first two years of the policy’s availability, the carrier can take extra steps to rule out fraud and ascertain that the insurance claim is legitimate. Hence, it may take longer to receive the payment.
- Suicide during the contestability period. If the insured committed suicide during the contestability period, their beneficiaries will not be entitled to the death benefit. They may only receive monetary compensation equivalent to the premiums paid by the policyholder.
- Murder inquiries. If the insured was murdered, the payment can be suspended until the beneficiary is ruled out as a suspect.
- Death during illegal activities. If, for example, the insured died while driving under the influence, the insurance company might withhold payment. Fraud. If the insurance company finds out that the insured had dangerous hobbies or addictions that they hadn’t declared when signing up for insurance, the beneficiaries may not be entitled to the death benefit.
While no one likes to think of their passing, taking measures to lessen the blow such an event can have on your family shows foresight and – most importantly – love. Make sure to get in touch with an independent insurance broker and purchase a life insurance policy with a carrier that you trust. And as always, drop me a line if you have any questions, I’d be happy to help.