Life Insurance Death Benefits: What You Need to Know
Learn about the death benefits of life insurance, including the payout process and how beneficiaries can use the funds
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Life is full of surprises, and none of us knows what the future holds. While it's impossible to predict what will happen, we can take steps to prepare for the unexpected, as not all surprises are pleasant. When it comes to protecting loved ones or family members' future, life insurance is one of the most preferred options by millions of Indians. Every rupee invested in life insurance is worth it as it ensures peace of mind and financial protection for those closest to you in the event of your death.
According to the IRDAI's handbook, approximately 328 million Indians have opted for life insurance. In this article, we'll learn what life insurance death benefit is, discuss its importance, and how it protects your family's future.
What is Death Benefit?
Death benefits are the amount (guaranteed sum assured) your designated beneficiaries will receive from your life insurance policy when you pass away. This benefit is usually paid out within 30 days of the claim being filed. It is typically tax-free and can provide financial support to your loved ones during a difficult time.
Some life insurance policies offer additional benefits, such as terminal illness, accidental death benefit riders and more. These benefits provide additional financial support if you are diagnosed with a terminal illness or if your death is accidental.
How do Life Insurance death benefits work?
In a life Insurance plan, the death benefit is a crucial component that provides financial support to your beneficiaries.
When you purchase a life insurance policy, you name a beneficiary who will receive the death benefit if you pass away while the policy is in force.
Depending on your needs and budget, you typically choose the death benefit amount at the time of purchase.
The sum assured can be a fixed amount or a variable amount based on the type of policy you choose.
If you pass away while the policy is in force, your insurance company will pay out the death benefit to your designated beneficiary.
Your beneficiary can use the money for any purpose, such as paying off debts, covering living expenses, or investing for the future.
Therefore, choose a policy with a death benefit that meets your loved one's financial needs and review and update your policy as your circumstances change regularly.
What is Covered?
Policyholders must understand what is covered and what is not! Here are some cases where beneficiaries are eligible to receive death benefits.
If death is caused by natural causes or health issues covered in the policy.
If death is from an accident, and the person wasn't intoxicated.
If the insured person commits suicide at least a year after buying the policy.
What is Not Covered?
There are specific instances where the beneficiary of a life insurance policy may not be eligible to receive death benefits. Here are some examples.
Suicide within the first year of purchasing the policy.
Death resulting from hazardous activities or self-inflicted injuries.
Death is caused by a sexually transmitted disease, like AIDS.
Demise due to drug or alcohol abuse.
Death resulting from natural disasters, such as earthquakes or tsunamis.
It is crucial to thoroughly understand the terms and conditions of a life insurance policy to ensure that your beneficiaries will receive the death benefits.
Tax Benefit under Section 10 (10D)
Section 10(10D) of the Income Tax Act states that the money the designated person receives upon the policyholder's death is entirely tax-free.
How does the death benefits payout work?
Life insurance policies have varying terms and conditions that affect the payout process. When receiving the death benefit, the policyholder can choose between:
a lump sum payout or
monthly instalments through an "assured income" to the beneficiary
Opting for a monthly payout can be a wise decision for the beneficiary as it helps manage the significant amount of money efficiently, avoiding quick exhaustion of funds due to poor money management.
In case of an early death, where the policyholder passes away within two or three years of signing up for the policy, the insurance company may take longer to investigate to rule out any suspicion of foul play. However, in cases where the policyholder dies many years after signing the policy, the insurance company is less likely to suspect foul play. It may carry out the payout process more quickly.
Being well-informed about the insurance policy and its terms is critical to make an informed decision while opting for a payout method.
How to Claim Life Insurance Death Benefits
Understanding the insurance claim process and its steps is vital to ensuring a smooth and hassle-free experience when needed. Here are the steps required for filing a death benefit claim.
Inform Insurer
Notify the insurance company immediately with details like the insured's name, policy number, date and location of death, and claimant's name. Obtain a claim notification form from the insurer directly or online.
Submit Claim Form
Fill out and submit a claim form with required documents like the original policy, death certificate, and any relevant medical records or accident reports.
Claim Settlement
Ensure all necessary paperwork is submitted, including the nominee's bank account details and medical records. The insurance company typically has 30 days to process the claim, though complex cases may take up to six months.
Choosing the right Life Insurance Policy
Choosing the right life insurance policy is an important decision, with several factors to consider. Here are a few.
Coverage amount
The coverage amount you choose should be enough to provide for your family's needs in the event of your death. Consider factors such as your income, outstanding debts, and future expenses when determining the coverage amount.
Policy period
If you choose a Term Life Insurance policy, you must choose a suitable policy period. For example, if you have young children, a 20-year term may be appropriate to provide for them until they are adults.
Premium
The cost of the policy is also an important consideration. While Term Life Insurance is generally less expensive than other life insurance plans, the cost can still vary based on the coverage amount, policy period, and your age and health.
Frequently Asked Questions (FAQs)
Here are some common questions and answers about Life Insurance death benefits.
Do I need life insurance death benefits?
If you have dependents who rely on your income or if you have debts that would need to be paid off in the event of your death, then life insurance death benefits can provide important financial support to your loved ones.
How much life insurance death benefit should I buy?
The amount of life insurance death benefit you need depends on your individual circumstances. Factors to consider include, your income, debts, and the financial needs of your dependents.
Can I name multiple beneficiaries for my life insurance policy?
Yes, you can name multiple beneficiaries for your life insurance policy. You can also specify how the death benefit should be divided among them.
Can I change my Life Insurance beneficiary?
Yes, you can change your beneficiary at any time during the term of your life insurance policy.
Do I need to pay taxes on life insurance death benefits?
No, life insurance death benefits are typically paid out tax-free to the beneficiary.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
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