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What You Should Know About Life Insurance Death Benefits

iQuanti: Life insurance helps you make sure your loved ones are financially stable if you pass away. There are many types of life insurance policies, including term and whole life insurance, but one thing they all have in common is that they pay out a death benefit to your beneficiaries when you die. Let’s dive deeper into how life insurance death benefits work and some key things to know about them.

What is a death benefit?

The death benefit is the money a life insurance policy pays your beneficiaries when you die. Depending on the policy, they can range from a few thousand dollars to millions. Death benefits are generally not subject to income taxes, meaning they can provide your beneficiaries with tax-free funds.

How does the death benefit work?

When you get a life insurance policy, you’ll name your beneficiaries, or those that the death benefit proceeds will go to when you pass away. Then, you’ll begin paying premiums to keep your policy in force. If you get term life insurance, you’ll pay premiums throughout the term (which typically ranges from 10 to 30 years). If you’re still alive once the term ends, you’ll stop paying premiums and your coverage will expire.

If you get a permanent life insurance policy, you’ll continue paying premiums until you die, since coverage lasts for your lifetime. Once you die, your insurer will pay the death benefit to your beneficiaries.

Every type of life insurance policy has a death benefit, although the way they work can differ. For instance, some policies may have an adjustable death benefit that you can increase or decrease, subject to certain conditions.

Naming beneficiaries

Naming beneficiaries involves picking the people you’d like to receive the payout if you die while the policy is in force. You can name multiple beneficiaries, and they don’t just have to be family or friends — you can also designate a charity or non-profit as a beneficiary.

Many people get life insurance to provide for their children, but they should be careful: in many cases, children can only receive death benefit funds until they reach the age of majority in your state of residence. Other options could be to name your spouse as a beneficiary so they can provide for your child, or create a trust and name it the beneficiary.

How payout works

When naming your beneficiaries, you can split up your death benefit however you want. For instance, if you have four beneficiaries, you can allow each to receive 25% of the death benefit. Here are some ways beneficiaries can receive their death benefit:

Lump sum: The beneficiary receives their entire death benefit at once in the form of a check or direct deposit.
Installments: The beneficiary receives their death benefit in fixed payments until it runs out.
Annuity: The beneficiary’s death benefit is placed in an investment account that can grow every year. Then, the beneficiary is paid out of the account every year until the account is empty. Annuities may be subject to taxes.
Once you die, the life insurance company isn’t alerted right away. The beneficiary should contact them and file a death claim to initiate the payout.

How to change beneficiaries

Sometimes, policyholders need to change beneficiaries. For instance, one of their children might reach the age of majority (making them legally able to be a beneficiary), or one of their current beneficiaries might pass away.

Regardless, changing beneficiaries is easy. You can contact your insurer and request a change of beneficiary form. Then, fill it out and send it back to the insurer. You can also do the same to change the death benefit allocation among your beneficiaries.

The bottom line

The death benefit is one of the most vital parts of your life insurance policy. It allows your beneficiaries to draw on extra funds in a way that works best for them if you die while the policy is in force. That said, a higher death benefit tends to cost you more in premiums. Plus, the death benefit may work slightly differently depending on the policy. Ensure you know your beneficiaries’ financial needs and balance those against your budget when shopping for a life insurance policy.

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