What is the Death Benefit, and How Can You Manage It?
Michael Levenson May 12, 2022
Losing a loved one is a tragic experience, and no amount of money can ever replace a cherished family member. However, the death benefit in a life insurance policy can soften the financial blow, and ensure that the survivors have the resources they need to live full, satisfying lives for years to come.
Let’s discuss what the death benefit is, how it works, and how you can effectively manage it once received.
What is the “death benefit?”
Simply put, a death benefit is a payout to the beneficiary of a life insurance policy (or in some cases an annuity or pension) when the insured dies. A death benefit can be for one beneficiary, or it can involve multiple beneficiaries. When connected with a life insurance policy, the death benefit is usually not subject to income tax. (Please note that there are a few exceptions and that death benefits from retirement accounts are typically subject to taxation.)
In most cases, the beneficiaries of a death benefit receive their payout in a lump sum. However, the policyholder may have the option to structure the payout in a different way. For example, the insured could stipulate that half of the payment goes to the beneficiaries immediately, while the other half is paid 1 year after the date of their death. Sometimes, trust is named as a beneficiary which has its own rules on how the proceeds are distributed.
How can you claim the death benefit?
If you are a beneficiary of your loved one’s death benefit, you’ll need to know which insurance company holds the policy of the deceased. You won’t receive the death benefit automatically; instead, you’ll have to file a claim for it with the proper insurer. The death claim form typically requires that you fill in the following information:
- The name of the insured
- Their Social Security number
- Their date of death
- Their policy number
- Your payment preferences for the death benefit payout
You will likely need to provide an official death certificate to the insurance company as well. If there are multiple beneficiaries of the policy, then each one will likely have to submit a death claim form respectively in order to receive their payout.
How should you manage your death benefit proceeds*?
If you’re the recipient of a loved one’s death benefit, you’ll probably want to ensure that the money you get lasts as long as possible, or at least that it will do the most good for your family. With that in mind, it’s always best to talk to a qualified financial advisor. Here are three options to consider in terms of managing your death benefit:
- Turn it into an annuity
If you want a safe, guaranteed income on a regular basis, then it may make sense to annuitize the death benefit – in other words, to schedule the payout over a longer time frame, instead of taking it as one lump sum payment. You can get a monthly check for a pre-defined number of years, or even receive payments for the rest of your life.
- Use it for life insurance
If you want to take the death benefit and “pay it forward,” you can take out a life insurance policy for yourself that covers your children and other surviving family members. With your lump sum payout on hand, you may even be able to pay for the entire policy in one premium payment! In addition, you can set up a trust fund to automatically pay your life insurance premiums every year, along with other expenses.
- Invest it in your retirement account
You can also use the death benefit to make the maximum allowed contributions to your retirement account (or accounts), such as your 401(k), traditional IRA, or Roth IRA.
While nothing can replace a beloved family member, a death benefit can greatly reduce the stress that survivors experience during that traumatic time. To learn more about life insurance, contact us today.
*We are not financial advisors and make no recommendation on how to use life insurance proceeds or other funds. The above options are examples for general information purposes only.