Many kinds of insurance exist though they all follow one of two cases: temporary or permanent. With regards to life insurance specifically a lot of defining characteristics can vary, however, they all have a death benefit. The whole life death benefit and a term insurance death benefit both provide one’s beneficiaries the same thing when the inevitable occurs.
A death benefit is also called the face value which at the death of the insured individual is paid to the policy owner’s beneficiary. Often times the policy owner and the insured are the same though not always. There are several things to understand and are discussed below.
What is a death benefit?
The death benefit simply put is the amount a chosen individual or entity gains in their chosen distribution method. For example, if you have a $150,000 term, universal life, or whole life policy then at the insured’s death that amount of money is delivered to the beneficiary or beneficiaries.
The distribution of the money can be done in several different methods. The most common form of death benefit payout is a single lump sum check or payment. The other common payouts are annual or even monthly payments. These are the usual ways in which to have a death benefit put to use but others exist that are more situational, like that of paying estate taxes for example.
How is a death benefit calculated?
When you apply for a life insurance policy part of the application process is to select the death benefit amount you are looking for. The insurance company goes through its underwriting process to determine if it’s a legitimate value to approve. Their process varies slightly from one to another but in general, they take into consideration a list of things from age, income, and health and then verify that information the best they can.
In addition to the insurance company doing their own due diligence (called the underwriting process which may or may not include blood work and physical), they also rely on the agent to help them avoid risks specifically like fraud or illegal activities like money laundering that’s attempting to utilize life insurance towards those ends.
What do premiums get you?
Premium payments are the consideration that is required on a regular, often monthly basis to keep a policy in force. If premiums are not paid then as with many other things first you get a late notice and if not taken care of swiftly, the cancellation will occur due to nonpayment.
Now that doesn’t necessarily mean that you aren’t covered still. This is an area where usually speaking if death happens you can still file a claim and get the death benefit and the back payments owed will be subtracted from the total value.
That being said don’t rely on this, make the timely payments so you don’t have to worry if the protection is still there or not. What many wealthy, businesses and those getting whole life insurance start doing is paying premiums either annually or near to that as possible. The reason for this is simply to ease their mind but also to keep the protection in place as long as possible without a possible lapse of coverage.
For whole life insurance, there are added benefits for doing so. Increased cash value growth due to less expense and risk for the insurance company are but a few of them, though perhaps the most useful.
How to tell you are a beneficiary
First of all, a beneficiary has to be explicitly stated as such on the life insurance policy. This is something that the policy owner can change throughout the policy’s duration. You can name one or more when applying or add them later.
Much of the time someone’s spouse is listed as the primary beneficiary and then children are listed as secondaries with each of them getting an equal share. Secondary beneficiaries only get the benefit if the primary is not alive to do so.
Lastly, one does not have to list a person as a beneficiary but can also list entities. These can be anything from a business, charity, or family trust.
Heirs vs beneficiary
When it comes to life insurance there are two types, sort of. Heirs are sort of assumed to be designated but this is only in the event when someone doesn’t have a will. Even so, however, those listed specifically on the deceased’s life insurance policy will receive benefits. Many reasons exist why one may not list their direct family members like trying to ensure the continuation of a business or to leave money to take care of specific people.
Changing beneficiaries
Some life insurance policies require the permission of one’s spouse. Some states require one to name their spouse and only change it with their approval. One thing to note also is that you can’t typically list a minor as a beneficiary for several reasons which is why it’s very important to also have your trusts and wills written up to handle these sticky situations.
The most difficult thing to deal with regarding beneficiaries is when you have irrevocable beneficiaries chosen. What this means is that an insurance policy has had a specific beneficiary named that cannot be changed by the policy owner without their express approval.
Generally speaking, changing a beneficiary is as simple as calling the company though often they require a beneficiary change form to be filled out and submitted.
How to file a claim
When you designate a beneficiary you are asked for at least the name of the individual and their relationship. You can also include your date of birth, social security number, and sometimes more. The more information provided the easier it is for the company to contact them to settle the death benefit payout.
Simplified death benefit claim steps
- Contact the insurance company and notify them you need to file a claim.
- Provide the policy number and the insured’s death certificate. Depending on the company their claims process will be slightly different so do as they ask to finalize things on your end and then…
- Do the hard part now which is to wait.
What to consider after a payout
A whole life insurance death benefit will be paid within 60 days if not less. Something you should know to put your mind at ease is that death benefit payments are received tax-free by the beneficiary so as to not put them in a bad financial position.
If you are really good with money then receiving the money in a lump sum may be a great option for you to take. If you are not great with large sums of money and think you may just spend it frivolously then it may be better to get installment payments(a chosen amount each time until the balance is run out) or you could get an annuity to facilitate monthly or annual payments.
Questions about if you have enough death benefits or otherwise let me know.