What Is Death Insurance And Do You Need It?

Shawn Plummer

CEO, The Annuity Expert

Death Insurance is one of the most misunderstood and neglected aspects of comprehensive financial planning. Not being prepared for death can have far-reaching consequences that could affect your family, estate, and even business in ways you may not expect or be aware of. Understanding the nature of these policies, what they cover, and how to compare them is crucial to making sure your loved ones are taken care of should something happen to you. Please keep reading for more information on what these policies offer so you can decide whether it’s right for you.

What is a Death Insurance Policy?

In the unfortunate event of your death or diagnosis with a terminal illness, ‘life cover’ – otherwise known as Death Insurance – will provide a lump sum amount to those you have nominated as beneficiaries. If no recipients were named beforehand, it is up to an appointed Trustee or your estate who receives the money. This money can cover funeral costs, final debts, or your family’s needs.

Life Cover also pays in the event of a diagnosis of a severe illness such as cancer or heart attack. This is known as ‘critical illness insurance’ and provides a lump sum payment to help you cope with the financial burden of these illnesses. For example, the payment can cover medical bills, pay for treatments, or help with lost wages.

Death Insurance

Is Death Insurance The Same as Life Insurance?

Yes, it is the same as life insurance. This type of insurance provides a death benefit to the beneficiary in the event of the insured person’s death. This death benefit can be used for funeral expenses or other costs associated with end-of-life care.

Like life insurance, the policy generally pays out a lump sum that can be used for various purposes, such as financial security, debt repayment, or educational expenses. Life insurance also allows policyholders to add additional benefits such as disability and long-term care coverage. So although this type of insurance provides a death benefit, it is not the same product type as life insurance.

What Is Death Insurance And Do You Need It? (2023)

Is it Better to Have a Will or Life Insurance?

A Will is an essential document, even if you have a life insurance policy with determined beneficiaries. Wills and life insurance policies are two different instruments that serve divergent purposes. By crafting a Will, individuals can outline the dispersal of their assets when they pass away, so those left behind know how to properly manage them according to their wishes.

It is important to note that a Will does not necessarily replace life insurance. Life insurance proceeds are typically paid soon after the death of an insured individual. At the same time, assets outlined in a Will may take much longer to distribute depending on state laws and probate processes.

Moreover, if individuals own property or have other assets they want to pass on to a particular person, they must include those assets and the beneficiary in their Will. Life insurance policies may not detail specific property or assets but provide financial coverage for the beneficiaries if you die.

Both estate planning tools should be considered when creating an estate plan. It will help determine how you want your assets dispersed and who gets what. In addition, a life insurance policy can provide financial security for your loved ones once you have passed on.

Setup a Will and Estate Plan for an affordable price at:

Death Benefit In Insurance

What Causes of Death Will Life Insurance Cover?

Life insurance typically covers deaths from natural causes, accidents, suicide, or illness. Therefore, it is essential to check the policy details to ensure that the coverage meets your needs and will provide protection in all situations.

Some policies may not include suicide, while others may have specific provisions for additional coverage. Additionally, some policies may not cover death caused by certain medical conditions, so it is essential to read the policy carefully.

Life Insurance Does Not Cover What Types Of Death?

Life insurance coverage may extend to various fatalities, including fatal accidental incidents and natural events; nevertheless, an investigation might be initiated if pre-existing conditions or suspicious circumstances are present. When this occurs, the life insurance company has reason not to grant the death benefit claim. Here are some reasons why they may refuse payment:

  • Suicide: Most life insurance policies have a suicide clause, which states that the death benefit is not paid if the policyholder commits suicide within a specific period (usually two years) following the policy’s effective date.
  • Intentional Acts: Life insurance companies typically won’t cover death caused by intentional, self-inflicted injury or other illegal activities.
  • Drug and Alcohol Use: If the life insurance company discovers that the death was caused by drugs or alcohol, they can decline to payout on the policy.
  • High-Risk Occupations: Life insurance companies might also deny death benefit claims if the deceased person was involved in a high-risk occupation such as firefighting, combat zone service, or commercial fishing.
  • Fraud: Lastly, if a policyholder provided false information about their health or lifestyle habits when applying for the policy, the life insurance company may use this as an excuse to deny the death benefit claim.

What Happens to a Life Insurance Policy When the Policyholder Dies?

In the event of the policy owner’s death, the life insurance company will award the designated life insurance beneficiary with a death benefit. This sum will be distributed to their estate if no named beneficiary is present. The death benefit payment amount varies depending on the insurance plan type and the policy’s face value. This money can be used to pay off debts or mortgages, cover funeral expenses, or provide an inheritance for loved ones.

Life insurance plans are flexible and can be tailored to meet individual needs and budgets. Various options are available, from term life insurance that provides coverage for a specific period to whole life insurance that offers a guaranteed death benefit and cash value. Life insurance policies can also be used as an investment vehicle in the form of variable or universal life insurance, which allows policyholders to accumulate cash value over time while receiving a death benefit upon passing away.

How Are Life Insurance Beneficiaries Paid?

Once the life insurance company has processed and approved the claim, death benefits are usually paid to the beneficiary or beneficiaries in one lump sum payment. However, if there is more than one beneficiary, they can decide how to divide the proceeds.

In some cases, however, it’s possible for a beneficiary to receive death benefits over time instead of as a lump sum. For example, suppose the policy includes an option to receive benefits in installments. In that case, beneficiaries may get their proceeds as periodic payments that last for a certain period, like ten years or until age 65. This payment plan is known as a “life income” option.

It’s important to remember that the beneficiary may owe taxes on the life insurance death benefits they receive, depending on the type of policy and whether any premiums were paid with pre-tax dollars. The life insurance company typically sends a 1099 form to the policyholder and the IRS after paying out death benefits. Beneficiaries are responsible for reporting their income from a life insurance policy on their taxes.

How Are Life Insurance Benficiaries Paid

How Long do You Claim a Life Insurance Death Benefit After Death?

You can initiate a claim for your life insurance policy’s death benefit at any time you wish since there typically isn’t an imposed time limit. But, of course, if your policy includes language that details the allotted period of opportunity available to beneficiaries about making a claim, then it is best to adhere accordingly.

To move forward with filing a life insurance claim, you’ll need to provide some documentation for the policy to be validated and your claim to be processed. This paperwork typically includes the following:

  • A certified copy of the insured’s death certificate
  • An original or certified copy of the insured’s life insurance policy
  • A valid government-issued photo ID
  • A completed and signed claim form

Once these documents are reviewed and accepted, the life insurance company should begin to process the claim. It can take anywhere from a few days to several weeks for the policy’s beneficiaries to receive payment. If any additional documentation or follow-up is needed, this will prolong the process.

Can You Cash Out a Life Insurance Policy Before Death?

If you possess a permanent life insurance policy, you can withdraw cash before your passing. This process, known as an accelerated death benefit rider, is commonly used by those suffering from terminal illnesses to help cover medical expenses and other end-of-life costs.

The amount available for withdrawal depends on the type of policy and the insurer that issued it. Generally speaking, you can withdraw between 25% and 95% of your policy’s face value, with the exact amount determined by your policy’s terms and conditions.

Remember that if you choose to withdraw cash from your life insurance policy, it will reduce the death benefit payable to your beneficiaries upon your passing. Additionally, some policies may not provide an accelerated death benefit, so please check with your insurer before making any decisions.

Accelerated death benefits can be a great way to cover medical bills, funeral expenses, and other end-of-life costs that arise before your passing. However, it is essential to remember that it will reduce the amount paid out by your policy when you pass away and should only be used as a last resort.

Next Steps…

Death is a topic that many people do not like to think about, but it is an important one. No one knows when their time will come, so it is essential to be prepared. Many insurance policies are available, so research and find the right one for you and your family. Having a policy in place can help give you peace of mind knowing that you are prepared for the worst. Contact us today to discuss your individual needs and get a free quote!

Death Insurance

Request A Quote

Get help from a licensed financial professional. This service is free of charge.

Contact Us

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

Scroll to Top