How Are Death Benefits Paid from a Life Insurance Policy

A death benefit is the amount of money a life insurance policy pays to the beneficiary if the covered party dies while the policy is in place. This is the amount you leave behind if you insure your own life. Life insurance is a unique type of investment. It helps cover your loved one’s needs if you cannot do so. You may decide this is the best way to leave money behind to your loved ones. Yet, it is very different from other inheritances you may leave. Here is what to consider. 
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How Do Death Benefits Work? 

When buying life insurance, you choose the amount of coverage you need. You choose the length of the policy, in a term policy, or elect to invest in a whole-life insurance policy. When you make your purchase, you determine who will receive the funds, or death benefit, from the plan. This is the beneficiary of the policy. You can’t be both the insured and the beneficiary because you have to die for the policy to pay. 

If you die while the policy is in place, the death benefit automatically goes to the beneficiary. It is never just passed down to your heirs. For example, if you name your cousin to receive the death benefit, but have children, the cousin receives the funds.  

More so, death benefits are not a part of your estate after you name a beneficiary. That means they do not go through the probate process. Creditors and others to whom you owe money cannot try to use the benefits from your life insurance policy. 

Most often, the beneficiary receives the death payment within a matter of weeks or months after your death. They can use the money in any way they would like to. Unless you create a trust to manage the money, you cannot control the way the beneficiary uses the funds for the most part. There are usually no income taxes levied on these funds. This is one of the key reasons to leave funds behind to your loved ones through life insurance. Keep in mind, however, that estate taxes might apply. 

Because someone needs to alert the insurance company of your death, it is important to let your life insurance beneficiary know that he or she is receiving the funds. It is important for you to discuss how to access the funds by filing a death benefit claim. If you are unsure your loved one will know what to do, you can elect your will or power of attorney to provide instruction to your beneficiary after your death. Most often, your agent can help your loved one through this process very easily. 

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