Cost & Coverage
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The death benefit is the main purpose of a life insurance policy; it's essentially what you're paying for when you sign up for life insurance coverage.
Life insurance protects your loved ones from the financial risk of being without your income when you die. If you’re covered, the insurance company pays your beneficiaries (the survivors you selected in your policy agreement) a sum of money called a life insurance death benefit.
If you buy a $500,000 life insurance policy, that means, with some rare qualifiers, the carrier will pay that money in its entirety as a $500,000 death benefit to your beneficiaries if you die while the policy is active. The amount of coverage you need is the largest factor in determining your premium payment, so make sure not to buy more than you can afford.
Your beneficiaries can use the death benefit to pay their bills and finance their lifestyle when you are no longer around to contribute an income. There are no restrictions to its use, which can cover anything from taking a vacation, buying stocks, and even paying taxes.
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The life insurance death benefit payment is equivalent to the amount of coverage you purchased when you signed up for your life insurance policy. It can range from a few thousand dollars to millions of dollars, but the exact amount you should purchase is contingent on your own personal needs.
When purchasing life insurance coverage, take into account all the financial expenses you help cover. That could mean payments on an auto loan, for example, which keep the car from being repossessed if your loved ones can't continue paying the bills.
In fact, any loan debt that your surviving spouse (or anyone else) had co-signed will become his or her sole obligation when you die.
The death benefit should be large enough to cover a variety of situations, including end-of-life expenses like the cost of a funeral, or the cost of college tuition if you have dependents. It's common for someone with two dependents and a spouse to need well over a million dollars in coverage.
Although the death benefit is paid to the insured's beneficiaries upon death, it doesn't always happen automatically. The life insurance company doesn't always know when the policy owner has died, so the beneficiary must alert them by filing a claim.
Take these steps to receive the death benefit payment:
Once you file a claim, you may receive the death benefit in as little as one to two weeks, but it could take as long as 60 days if the life insurance company needs more time to review the claim.
Delays may be caused by a suspicious death that occurs during the contestability period, which lasts for two years after the policy is put in force. During this time, the life insurance carrier reserves the right to dispute any death benefit claim.
Others may choose to convert the death benefit into an annuity, depositing the death benefit payments into an investment account from which yearly annuity payments are made to the beneficiary until the money runs out.
If you lied about or misrepresented any personal or medical information during the application process to obtain a lower premium rate, the life insurance company may find out when you die and decrease the death benefit.
The policy holder is expected to tell the complete truth about his or her medical history and lifestyle, including any illnesses and risky hobbies, when signing up for an insurance policy. The life insurance company will use that information along with your coverage needs to determine the cost of your premium payments.
If the insurance company discovers false information, they may reduce the death benefit by the amount in premiums that you would have paid had you represented yourself truthfully. The carrier may even cancel your policy altogether and deny your beneficiaries the death benefit that you had been paying through your life.
Another way the death benefit may change is with an adjustable life insurance plan. True to its name, under this type of insurance plan you can adjust the death benefit amount as your needs change.
Unlike term insurance, cash-value life insurance comes with an investment-like component that gains value over the years. This will increase the death benefit if you don’t access the cash value while alive.
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The beneficiary is the person(s) or entities you choose to receive the death benefit payment after you've passed away. You choose your beneficiary at the time you take out the policy, but you should also periodically update your beneficiaries if your circumstances change throughout life.
Your beneficiary doesn’t have to be a person; you can also name an organization, business, or charity.
Many people choose their spouse as a beneficiary. In some states, you’re required to by community property law, unless you ask for the spouse’s consent otherwise. Also, keep in mind that if you get divorced, it will not be reflected on the life insurance policy until you ask the carrier to change it.
You cannot name a child as the direct beneficiary of the death benefit, although you can direct the life insurance proceeds to go into a trust that the child can access for necessary expenses.
If no one can claim the death benefit, it may go toward your estate, in which case it'll be used to pay off any of your outstanding debts and may be taxable.
An accelerated death benefit is paid to policy holders who are still alive, but who have a terminal illness and are expected to pass away soon. Your life insurance company will require proof of life expectancy in order to qualify. This is can be anywhere from under six months to 24 months depending on the provider.
Once you meet the qualifications, you can access a portion of the benefits under the accelerated death benefit rider. Riders are policy add-ons that usually cost extra, but the accelerated death benefit rider is often included at no additional cost depending on your carrier.
The accelerated death benefit can be used to relieve your loved ones of having to foot the bill out of pocket. However, if you access a portion of the death benefit early, you will reduce the total death benefit, meaning there will be less to disburse to your beneficiaries when you die.
The death benefit is generally not taxable if you paid your premiums using after-tax dollars.
However, it may be taxable in certain circumstances:
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