Life Insurance

Life Insurance Death Benefits, Explained

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People purchase life insurance so their heirs will receive the death benefit if they pass away while the policy is in place. At its most basic, a life insurance policy is designed to protect those you love after you're gone, and the life insurance death benefit does just that. When you pass away, the person, persons, or organization you choose as a beneficiary receives that death benefit either in a lump sum, as an annuity, or spread out over time.

Let's take a closer look at some of the questions you may have about death benefits.

What is a death benefit?

When you purchase a life insurance policy, the amount of the policy you buy refers to the death benefit. If you're buying death benefit insurance for $1 million, your beneficiary will receive $1 million at your death, in most cases. It's important to remember that the higher the death benefit, the more you'll pay in premiums. Having said that, it's essential to be sure your death benefit will be substantial enough to care for your loved ones.

How much death benefit do I need?

The amount of life insurance you choose to purchase is based on your unique circumstances. If you intend for the policy to protect your family while you have young children, online calculators can help you determine the proper amount. One straightforward estimate suggests purchasing ten times your annual income. Another considers taking that amount and adding $100K per child for educational purposes. 

Suppose the death insurance policy is intended to benefit a charitable organization. In that case, you may want to base your decision on the cost of the premium or the size of the legacy you wish to leave.

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Are death benefits payable to a beneficiary?

Yes. When you purchase life insurance, you name a beneficiary, and only the beneficiary can receive the death benefit. It can be a single person (often a spouse or partner), multiple people, a charitable organization, or even a family business. It's your choice, and should your circumstances change, you may be able to alter your beneficiaries unless you've named someone as an irrevocable beneficiary. 

How does the beneficiary receive the death benefit?

Unless the policyholder has designated a particular timeframe for receiving the payout, there are three primary death benefit options for receiving your money. Most people choose to take it in a lump sum, which they'll receive roughly one or two months after the death. You may also create an annuity for the death benefit, which will provide regular payments but may have tax implications. Third, you may be able to set up installment payments with your insurance company, receiving a check until the money runs out.

Are life insurance death benefits guaranteed?

In most cases, yes, there's a guaranteed death benefit. The amount stated when the policy is purchased will be the amount the beneficiary receives. There may be a difference in a few cases, such as with adjustable life insurance. And if you buy a whole life policy and then borrow against the policy's cash value without paying it back, the death benefit will be reduced by that amount.

Are death benefits taxable to the beneficiary?

Are life insurance death benefits taxable? In most cases, death benefits aren't subject to income taxes. If the death benefit becomes part of an estate, there may be estate taxes, and an annuity may also be subject to taxes. If you receive a death benefit, it's a good idea to talk to a tax advisor or accountant to make sure you're clear on death benefit taxes.

What do death benefits cover?

That's up to the beneficiary. Term life insurance policy death benefits are often used to provide for living expenses and education for the spouse and young children of the policyholder. Meanwhile, whole life insurance policies can provide end-of-life funding for a funeral and help pay off final debts. However, what to do with the death benefit is entirely up to the beneficiary.

How do I receive a death benefit?

If you're wondering how to apply for death benefits, it isn't a complicated process. You'll need to submit a copy of the death certificate to the insurance company. You'll also need the policy number, if you have it. You'll need to fill out a Request for Benefits form and submit that as well. In some cases, you can manage all of this on the insurance company's website.

What if I don't know if I'm a beneficiary?

Ideally, the policyholder informs all those who've been designated as beneficiaries of a life insurance death benefit. But if you suspect you're a beneficiary and have no other information, you can check out the National Association of Insurance Commissioners (NAIC) Life Insurance Policy Locator. This online tool may help locate a policy if you have reason to believe you've been named. But don't wait for the insurer to contact you, especially if time has passed since the policy was purchased. Name and address changes, among other factors, may influence their ability to find you.

How do I name someone as a beneficiary?

If you're considering your own life insurance policy, Ethos Life can help. Ethos makes the process of purchasing insurance easy, fast, and efficient. We can help you plan for your wishes with our end-of-life planning guide, and you can find practical information on choosing a beneficiary on our website.

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