The phrase “death benefit” may seem like a contradiction in terms, but life insurance is designed to benefit the survivors, while the benefit to the policyholder is peace of mind. Read on to learn all about death benefits, how they work, and how to claim them below.
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What is a Death Benefit?
A death benefit is a sum of money that is paid out to a beneficiary or beneficiaries when the policyholder passes away. It is intended to provide financial support to the beneficiaries and can be used for immediate expenses, such as funeral costs and outstanding debts, or longer-term support.
The amount of the death benefit is chosen by the policyholder at the time the policy is purchased. The amount may be based on various factors, such as the policyholder’s income, assets, debts, and other financial obligations, as well as the number of dependents they have and the dependents’ future needs.
How do Death Benefits Work?
The death benefit is typically paid out as a tax-free lump sum: the beneficiary gets the death benefit all at once and can make decisions about what to do with the entire sum. However, there are other payout options, including:
Installment Payments:
Receiving regular payments over time provides a steady source of income for the beneficiaries. This can be useful for people who are concerned about managing a large lump sum of money.
Annuity:
The death benefit is used to purchase an annuity, and the insurance company makes regular payments to the beneficiary based on the terms of the annuity. A Joint and Last Survivor annuity is a policy option available to married or common-law partners that provides ongoing income to the surviving partner after the policyholder passes away. The payments continue until the death of the surviving spouse or partner.
Family Income Benefit:
This is a policy option in which the death benefit is paid out in regular installments over a specified period, such as 10 or 20 years. This option can be particularly useful for families with young children who need ongoing support.
Be sure to assess the tax implications of each option before making a decision, as this will vary between options.
Who Gets the Death Benefit?
The recipient of a death benefit is known as the beneficiary. The policyholder designates the beneficiary at the time that they purchase the policy. Typically, a policyholder will designate their spouse or children as the beneficiary, but they can also choose a friend, a charity, a trust, a business, or any other individual or entity they want. A policyholder can also designate multiple beneficiaries. Note that the beneficiary does not have to be informed of their beneficiary status in advance, although it would be helpful when it comes time to file a claim.
The beneficiary can be changed at any time during the policy term (or the policyholder’s lifetime for whole/permanent plans). It is a good practice for policyholders to revisit their policy and to change the beneficiary if needed. For example, if they have a baby after purchasing the policy, they may want to designate a trust for the child as one of their beneficiaries. If that child then comes of age, the policyholder can eliminate the trust portion and have the death benefit go directly to them.
You can also designate your estate as the beneficiary on your life insurance policy. In this case, the death benefit would simply be rolled up with the rest of your estate and distributed according to the terms of your will. Be sure to review the tax implications of this option before you choose it.
How to File for the Death Benefit
The process of claiming the death benefit is fairly straightforward. These are the typical steps:
- Contact the insurance company with the name of the policyholder. They do not usually require policy numbers, so you will not need to dig through the policyholder’s records to find them. This portion of the process should be quite simple, and the sooner you do it, the sooner you may receive the death benefit.
- Provide the insurance company a copy of the policyholder’s death certificate and any other documentation they request. If you are working with a funeral home or mortician, they may be able to help you sort out this paperwork.
- Allow the insurance company time to review the claim. They will need to verify that the policyholder has indeed passed away and that their policy was in good standing at the time of their passing.
- The insurance company will then calculate the death benefit amount. This is usually the face value of the policy after any outstanding loans, or other deductions have been subtracted.
- Once all these steps have been completed, the insurance company will issue the death benefit in the format that you requested.
Claiming a death benefit can be painful and difficult. If you’re having trouble, seek support from a friend or family member, or ask your accountant or attorney to handle the process for you. You may want to take some time to grieve your loved one’s passing, but if you find that you are putting off filing your claim, reach out to you someone you can trust to help you with it.
Conclusion
Whether you are a policyholder or a life insurance policy beneficiary, it is essential to understand what death benefits are and how they work. Review your policy regularly to see if your designated beneficiary needs to be changed and if the policy options are still right for you and your family.
Do you have questions about life insurance death benefits, policy options, or anything else related to life insurance, critical illness insurance, or health and dental insurance? As one of Canada’s leading providers of No Medical and Simplified Issue life insurance, Canada Protection Plan is ready to answer all your questions! We look forward to providing you with the trusted information you need to make sound decisions for your financial well-being and your family’s future. Contact us today to speak to one of our licensed insurance advisors.
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