Death Benefit Payouts

Studies show that over that approximately three-quarters of us who have life insurance do not have adequate coverage levels for the stage of life we are in. It is important to review your policy as your life changes to ensure that your coverage is sufficient for your new needs.

Life insurance needs may not be as high as they are at other stages in life for those that are newly retired. But, it is also true that most new retirees do need to think about maintaining an adequate level of coverage.

Consider your children or spouse you may leave behind. Even though your children may be grown and on their own, and your spouse may be able to live comfortably on his or her retirement savings, there are many special circumstances in which they may find themselves in financial trouble if you were to pass, or vice versa, you if they were to.

If you are very ill before you pass away, you will incur many health costs, many of which may be passed on to your spouse or children if you pass away. Many seniors may have to live with a child if they are on their own and need help, and this may put a financial burden on the affected family members.

 There are also funeral costs to consider. It is important to ensure that your family members can recoup any financial losses after you pass away.

Term Life Insurance Policies vs. Whole Life Insurance Policies

There are two basic types of life insurance: term life insurance, where you choose the coverage amount and length of the policy, and whole or permanent life insurance, which combines an investment product with life insurance.

Term Life Insurance Policy Advantages

Term life insurance policies are easy to understand. You pay a low, fixed monthly premium based on the term life insurance policy term length and amount of coverage you choose. You can choose term lengths such as 10, 20 or 30 years, and life insurance coverage amounts anywhere from $100,000 to several million dollars.

Whole life insurance is often expensive, due mainly to its investment aspect, while a term life insurance policy is usually very affordable. Whole life insurance policies often cost thousands of dollars a year, as opposed to the mere hundreds of dollars a year that the majority of term life insurance policies run. 

However, term insurance is purchased with the “IF” you die concept, whereas whole life insurance is purchased for “WHEN” you die.  Should you live past the policy period of term insurance you could very well die without coverage.  Whole life insurance provides coverage until the day you die.  We always recommend having a enough permanent coverage to pay for the last expenses. 

The first step
When a loved one has expired and the funeral formalities are finished, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount.

These include:

1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method.

Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.