We all want what's best for our family and other loved ones. Sometimes, that might mean thinking about what we could do to best support them when we're no longer here. Life insurance could help provide you with a tool to do just that. Now, a policy doesn't actually insure your life — what it does is help insure against the financial hardship your beneficiary could face if something happened to you.
A life insurance payout, which is the financial benefit of a life insurance policy, could help cover a number of financial needs for your life insurance beneficiary, including debt repayment and living expenses. It could also help provide the financial means to maintain the same lifestyle, even when you're no longer around to help pay the bills. Providing additional financial security for your loved ones could be one of the best gifts you leave behind.
Choosing a Life Insurance Beneficiary
When you pass away, the beneficiary of your life insurance policy will receive the payout, which is also known as a death benefit. Therefore, choosing a beneficiary could be one of the most important decisions you make. A beneficiary could be an individual who is dependent on your income — or someone who would not be able to maintain their current lifestyle without your financial support. This could include your spouse, children or other loved ones who rely on you financially. A beneficiary could also be anyone you would like to give financial support to once you're gone.
You could also name more than one person as the beneficiary and choose to have the payout divided among those you choose. Or you could choose to give the payout to a trust, your estate or even an organization or charity that is important to you.
Consider choosing both a primary and contingent beneficiary for your life insurance policy. Your primary beneficiary will receive the payout in the event of your death. However, if your primary beneficiary dies before you do, your contingent beneficiary will receive the payout after you pass away. In both cases, you might want to consider the option to name a revocable beneficiary for your policy. This means that as the policy owner, you retain the power to change your beneficiary at any time (and you don't have to notify your previous beneficiary before doing so).
How Does a Life Insurance Payout Work?
Now, let's examine life insurance payouts. The payout is paid to the beneficiary of a life insurance policy when the person insured under the policy passes away. However, the beneficiary of the policy will need to file a death claim with the insurance company first. This usually requires documentation, such as a death certificate.
Your insurance company will then have a window of time in which to review the claim. After this process is complete, your insurance company will pay the benefits of the policy. Filing the death claim as soon as possible could be vital to receiving the payout in a timely fashion.
You might be wondering if payouts work differently between life insurance policy types. Term life insurance offers coverage for a set period. However, if your policy expires before you die, there will be no payout for your beneficiaries. So, consider keeping track of your current life insurance coverage. On the other hand, whole life insurance and universal life insurance offer coverage for your entire life, as long as you continue to pay premiums as required.
What Are Your Payout Options?
Policy owners usually choose how they would like the payout to be distributed to their life insurance beneficiary. Insurance companies have traditionally provided the funds as a one-time lump-sum payment. However, you could also choose to have the payout distributed in installments. Installment payments could allow you to set up a steady income stream that could last a number of years — depending on the size of the payments and how much life insurance coverage was in place.
Installments could be a great option if you have dependents who are young or still learning good money management skills. Rather than providing a large lump-sum payment, you could choose to have the coverage amount distributed to them slowly over time. Depending on your particular policy, you might also be able to use living benefits that could allow you to withdraw some of the value of your policy before you die. Please note that this could incur interest or fees or reduced death benefit.
The Internal Revenue Service (IRS) tends to want its share of any money received. However, payouts from life insurance policies aren't generally included in gross income and won't need to be reported, according to the IRS. Of course, there are exceptions. Your beneficiary may need to report interest, for example, as interest is considered taxable income.
There are many different factors you might want to consider when choosing a life insurance beneficiary and policy. An insurance professional could help you determine the right type of life insurance for your needs — which could help give you a sense of security in a sometimes uncertain world.