Planning for your future is a standard part of our lives, and life insurance is often part of long-term financial planning. Taking the time to buy a life insurance policy is a great way to provide support and stability to your family once you’re gone. Your loved ones can use the death benefit from your policy to pay off debts, pay bills, cover funeral expenses, or help with your children’s or grandchildren’s education. Your spouse may also need the death benefit payout if you are the sole breadwinner for your family. Losing a family member is tragic, but your family falling into financial ruin after can be avoidable.
What is a Life Insurance Death Benefit?
Purchasing a life insurance policy means your family or assigned beneficiary is entitled to a death benefit upon your passing. The dollar amount received from the insurance payout depends on the value of the plan you purchased. Typically, life insurance policies range from several thousand dollars to millions. You will need to decide how much money is enough. What amount would your family need to stay afloat after you’re gone? Would you like to leave them with enough to pay off any remaining debt you may have? Perhaps just enough for your funeral expenses? Or maybe you would like to add to your family’s savings, allowing them to use the money as a nest egg for future education.
How is the Death Benefit Paid Out?
The death benefit is paid out either in its entirety as a lump sum or in an annuity. If you were to choose the lump sum option, the full death benefit would be released to your beneficiary in a one-time payment. However, if you opted for the annuity option, your beneficiary would receive your death benefit in yearly installments until the entire amount had been released. The typical choice is the lump sum due to a family needing financial stability. Those who choose the annuity option can build up interest in their death benefit, making it a smart choice if a family has more manageable expenses and can afford the slow payout. There are two different annuities the policyholder can choose from.
- Fixed-Period Annuities: You can choose the set time in which your death benefit would be paid out to your beneficiaries. The typical periods are 10, 15, and 20 years. If your primary beneficiary were to pass away during your chosen period, the rest of your death benefit would be dispersed to an additional beneficiary. You would choose your first and secondary beneficiary when you purchase the policy.
- Lifetime Annuities: This option pays out your death benefit payments for life, until the money is entirely dispensed. This is an ideal option for a young beneficiary.
These options can seem a little overwhelming, and you likely have questions about which option and what amount would work best for your life insurance policy. Luckily, experienced insurance professionals like those at Hometown Life Insurance will gladly walk you through the process and help you find what insurance policy, benefit amount, and payout plans are right for you.
How Long Does It Take to Receive a Death Benefit Payout?
The time of a death benefit payout can vary by policy and by the details of the policyholder’s death. The payout time is usually between one week to a few months. Providing the required
documentation as soon as possible is the best way to kick-start a quick payout from your insurance carrier. Any incorrect or missing documentation could prolong the dispense of the death benefit. If the policyholder’s death were ruled suspicious in any way, that also could add additional time onto the wait clock.
What Should You Do with Life Insurance Death Benefit?
Once a death benefit has been paid out, how the money is spent is entirely up to the beneficiary. There are no restrictions. The money you receive can be saved, invested, or used for daily life as a replacement income.
It is highly recommended that when you receive a death benefit from a life insurance policy, you consult with a financial advisor to create a personalized monetary strategy. Different financial advisors will have other advice, so getting a second opinion may be beneficial. The most common uses of a death benefit payout are:
- Monthly Bills and Expenses: Everyday expenses can build up, especially when a primary income ends. Putting the benefit money into an account and having bills drawn directly from it can greatly relieve stress.
- Childcare/Dependent Care: If you suddenly passed away, children and other dependents, such as grandparents or grandchildren, would still need to be taken care of. Your death benefit can provide for the day-to-day expenses and their futures.
- College Tuition: College is notoriously expensive, and a death benefit can go far towards a degree.
- Outstanding Debts: When the policyholder passes away, their debt doesn’t. If you were to owe a deficit at the time of your death, the entity you owe money to could collect that debt from your family members. Your death benefit can pay that off.
- Medical Expenses/Funeral Services: Final medical expenses can be high, and once you’re gone, your family is given the bill. Your death benefit can pay off your final medical bills while also providing funding for your funeral expenses.
- Investing for Future Payout: If your beneficiaries do not anticipate high expenses after your passing, you may want to invest your death benefit for a later payment date. If you have your benefit released over the years, you’ll earn interest.
Who is Eligible to Receive the Death Benefit?
When you purchase your life insurance policy, you will choose your beneficiary, and possibly a second beneficiary if the first were to die before the full payout of your death benefit was released. Your beneficiary is the only person who has the capability of cashing out your death benefit. Anyone not listed as a beneficiary, regardless of their relationship to the policyholder, cannot collect the death benefit payout. It should be noted that creditors and debt collectors have no access to the death benefit.
How Do I Learn More?
If you are the beneficiary on a life insurance policy and the recipient of the death benefit payout, you can appreciate the financial support it provides at a difficult time. It is common for many people to reconsider their own financial planning and life insurance when they have a loved one that passes away.
Perhaps you have to update your life insurance or you realize that you need life insurance but don’t yet own a policy. That is okay – you can’t change the fact that you haven’t had it in the past, but it’s not too late to provide security to yourself and your family.
Our team of licensed professionals at Hometown Life Insurance are here to help you. Whether you are seeking a life insurance review of your current policy or searching for your first coverage, we look forward to providing you with unmatched customer service and a simplified life insurance process.
Life insurance isn’t something that should be put off, so reach out to us with any questions you may have and we can get started together.
