Considering what happens to our loved ones after death is a genuine and understandable concern. We want to know that we can continue caring for our loved ones after we are gone. A death benefit, for example, is a sum of money paid out to a beneficiary, or beneficiaries, on an active policy at the time of the insured member’s passing.
There are several ways that death benefit policies can be structured, depending on factors like the number of beneficiaries, the size of the estate left behind and the preferences of our lost loved ones. Death benefits are the primary purpose for securing life insurance coverage and the process of bequeathing a lump sum or assets to your beneficiaries.
Let us take a closer look at death benefits and all the options you should know about:
How Do Death Benefits Work?
Any life insurance policy worth investing in should have tax-free, customer-oriented, simple pay-out options that allow you to feel confident that your loved ones are covered, even when you are not there. The beneficiaries of your death benefits can also include organizations, such as charities, churches or businesses. When making this incredibly significant life decision, it would be best to consider a few different life insurance policies and pay-out types.
The two most common types of life insurance are term life insurance and permanent life insurance policies:
Term Life Insurance
A term life insurance policy has a term or period defined before signing up for the coverage. These “terms” usually range from 10 to 30 years and will only cover recipients if they die within the predetermined policy timeframe. The insurer’s policy will pay out a death benefit equivalent to that policy’s current value.
Permanent Life Insurance
As you can probably guess, permanent life insurance covers the insured for the rest of their lives. There is no expiration date on these policies, and they will continue to be in effect while the premiums are paid. Once the insured person passes away, their death benefits will be paid out as prescribed in the active policy.
Most pay-out options will fall into one of three main categories that are lump-sum payments, annuity payments and instalment payments:
Lump-sum Payments
Lump-sum payments are the most popular option for cashing out a death benefit. The money or assets in question are paid out in full and are accessible within two months once the necessary paperwork has been filed. This death benefit is tax-free and a way to be sure how, when and where your money is distributed.
Annuity Payments
Another popular means of cashing out a life insurance policy is annuitized payments. With these policies, your death benefits are invested into an annuity account and can be paid monthly or annually for up to 30 years. Annuity gains are, however, taxable income and will require your beneficiaries to pay some taxes on these payments.
Instalment Payments
A variation to the annuity payment option, instalment payments allow the insurer to create a predetermined pay-out structure. This could be the amounts paid out to beneficiaries or a proportion of those death benefits over a specific period. The insurance company will place the total sum in an account that pays interest on the money until the policy runs out – which means it can be taxable income with the interest earnings.
Claiming Death Benefits from a Life Insurance Policy
Once the insurance policy owner or the insured passes away, the responsibility to claim the death benefits will fall to the beneficiaries or a predetermined executor of that deceased’s will. Insurance companies will take a month or two to review the death benefits claim and ensure the wishes of the policy owner or insured are honoured, respected and followed precisely.
There are only a few pieces of documentation that are required to fulfil the insurance claim that needs to be reviewed before the death benefits are paid out:
- A certified copy of the policyholder’s death certificate
- Life insurance policy document or the policy number of the deceased
- The life insurance claim form
Different insurance companies, policy types and pay-out options will vary, and you should always check what documentation and confirmations your insurers will need to secure death benefit pay-outs. With that in mind, here is how life policy claim is typically made:
- Contact the insurance company with the policy number and insured person’s details.
- Complete that insurer’s (insurance company) life insurance claim form online or in hard copy.
- Please provide a copy of the death certificate, including any other documents they might require.
- Allow a week for the review process and 60 days to receive the death benefits.
- Once the claim is approved, they will facilitate how the proceeds are distributed.
There are a few reasons a life insurance claim could be denied. Here are some of the most common ones to consider:
- Lapsed Policies – The life insurance policy was not active at the time of death of the policyholder.
- False Claims – Misleading, false statements or incorrect information in the policy or insurance claim forms could prevent approval.
- Exclusions – Some life insurance policies will have exceptions for specific death scenarios perceived as risky, like mountain climbing or skydiving, or potentially fraudulent.
Before you go
Hopefully, you now have a clearer sense of what death benefits are, how they work and what you can do to ensure that your loved ones are covered after your death. Life insurance policies are varied and ever-evolving, so contact potential insurance brokers and consult with financial advisors to guarantee that you receive the death benefits you deserve.
Universal Insurance Administrators are at the forefront of South Africa’s insurance and financial risk industry. Providing a range of – products and plans to help ensure that all South Africans have access to reliable and affordable life insurance and death benefits. Contact us today for more information about the products and services we offer at Universal Insurance Administrators.
