Plan for Tomorrow | What to do after receiving a life insurance death benefit
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What to do after receiving a life insurance death benefit

Mar 6, 2024, 7:26:56 PM | Reading Time: 4 minutes

When you are listed as a beneficiary on a life insurance policy, the policyowner likely wanted to help alleviate some of the financial worry that could come with their passing. From covering final expenses to providing money for future bills, life insurance proceeds can offer a safety net when it’s needed most. If you are a life insurance beneficiary and are wondering how to claim a death benefit, the process is usually straightforward. Here’s a closer look at how to file a life insurance claim and possible options for using those proceeds.

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What is a life insurance death benefit?

The death benefit is the amount of money a beneficiary will receive from a life insurance policy following an insured’s death. When an individual purchases a life insurance policy, they choose a coverage amount, which is the amount of money the insurance company will pay their beneficiaries following their death.

Who receives life insurance proceeds?

When life insurance coverage is put in place, the insured names a beneficiary or beneficiaries who will receive the death benefit. Common beneficiaries include a spouse or partner, child, family member, or charity. A policy often asks for the insured to designate a primary and secondary beneficiary, where if the primary beneficiary passes away, the death benefit will go to the contingent beneficiary. An insured may also choose to have multiple beneficiaries, allowing a certain percentage of the death benefit to go to each person. If you are unsure if you are a beneficiary and the policyholder is no longer alive, you can contact the life insurance company directly.

Filing a life insurance death benefit claim

To receive benefits from a life insurance policy, a beneficiary will need to file a claim with the life insurance company following the death of the insured. After the insurance company’s claims department is notified, they will typically send a guide that outlines the claim process and a form to complete. Along with returning the completed form, a beneficiary will need to submit a certified death certificate. This can be obtained from a funeral director or county courthouse.

  • Settlement options for receiving death benefit Options can vary between life insurance companies, but beneficiaries can typically choose how they would like to receive a death benefit, including:
    • Lump sum payment: Beneficiary will receive a single payment of the entire death benefit.
    • Specific income payout: Life insurance death benefit is paid in installments over a chosen time period.
    • Lifetime annuity: Beneficiary will receive a guaranteed payout for the rest of their life. The amount is typically determined by the age of the beneficiary.
    • Interest only payout: If only a small amount of death benefit is needed, this option allows for the principal of the death benefit to be held by the insurance company and the beneficiary receives the interest earned.
    • Interest accumulation: If the death benefit is not needed immediately, the money can be put into an interest-bearing account by the insurer. The account has the potential to earn interest and the value can grow over time. The beneficiary can typically make withdrawals from the account when needed. This option may not be available in all states.

When do beneficiaries pay taxes on a death benefit?

Death benefit proceeds are generally not taxable if they are received as a lump sum or in income payouts. If a beneficiary chooses a payout option where interest is earned, taxes may be owed on that interest and included in their taxable income. If an estate is named as a beneficiary, the person inheriting the estate may have to pay taxes.

Options for using a death benefit

Life insurance proceeds can be used for a variety of purposes, including funeral expenses, paying off debts, helping with day-to-to expenses, or supplementing retirement. When a beneficiary receives a death benefit, it can be helpful to meet with a financial professional to discuss possible options and how the money could fit into a financial plan. During the meeting, helpful questions to ask include:

  • How can the death benefit gain interest?
  • How is life insurance paid out to multiple beneficiaries?
  • How are taxes paid on death benefits?

The loss of a loved one can often be an emotional time, and making financial decisions is not always easy. Talking to a financial professional can help simplify the process and allow you to discuss any concerns, while exploring the different options available.

This information is general in nature and should not be construed as any legal or tax advice. Neither North American Company® nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.