If you have a loved one who named you as a beneficiary of their life insurance policy, they likely wanted to provide a little peace of mind by helping protect your financial future and alleviating some of the stress that can follow a difficult loss. Knowing how to claim a death benefit may seem overwhelming, but in most cases, the process is fairly simple. Here’s a breakdown of how to file a life insurance claim and possible options for using those proceeds.
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.
A key part of putting life insurance protection in place is naming a beneficiary or beneficiaries who will receive the death benefit. A spouse, child, family member, or charity are common beneficiaries. 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 policyowner is no longer alive, you can contact the life insurance company directly.
Following the death of an insured, a beneficiary will need to file a claim with the life insurance company. Once the insurance company’s claims department is notified, they’ll typically send a form to complete and a guide that outlines the process. 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.
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 a death benefit is received as a lump sum or in income payouts, the proceeds are generally not taxable. If a beneficiary chooses a payout option where interest is earned, taxes may be owed on that interest and is included in their taxable income. If an estate is named as a beneficiary, the person inheriting the estate may have to pay taxes.
There’s no one way to spend life insurance money, but depending on the settlement option chosen, the proceeds can be used to help with funeral expenses, pay off large debts like education costs or a mortgage, or be set up to provide payments in regular intervals as an extra source of income. 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. Questions to address during this meeting include:
Coping with the loss of a loved one can be a difficult process, because in addition to dealing with grief and tough emotions, there are often financial details to sort through. Talking to a financial professional can alleviate some of the pressure and help you make informed financial decisions.
This information is general in nature and should not be construed as any legal or tax advice. Neither Midland National® 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.
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