Options for Term Life Insurance Death Benefit Payouts

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There are pages written about how to buy term life insurance, but very few devoted to death benefit claims and payouts. Sadly, this topic is so neglected, that awareness levels on this matter are very low. Term life insurance is the best kind of life insurance available today, and it would be a shame if your beneficiaries do not know or are misled about payout procedures. This article will help fill the gap and provide some insights into the types of term life insurance payouts.

The first step

When a loved one has expired and the funeral formalities are finished, you, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options

When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum

Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount. These include:

  1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
  2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
  3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
  4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
  5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

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Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method. Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.

Related:

~ Life Insurance Reality Check – Do you have enough?
~ Protecting Your Mortgage and Other Assets with Term Life Insurance
~ 6 Factors that Can Increase Your Life Insurance Premium Rates
~ Tips on Purchasing a Disability Insurance Policy – Forgo it at your own Peril

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{ 1 comment… read it below or add one }

jonathan parker August 29, 2011 at 2:26 pm

how do i find if i was the beneficary of a life insurance policy because my father died and my family wont let me look at the will.

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