What Happens With a Life Insurance Policy After Death?

Life insurance is a financial product that protects your family from having to shoulder your unpaid financial responsibilities after your death. Proceeds from a life insurance policy may be used for any purpose, however. After you die, your heirs should know what happens to your policy since benefits are not automatically paid out.

Process

After you die, your beneficiaries must make a claim for the death benefit. A copy of the death certificate must be obtained from the funeral home. Next, a death claim form must be filled out with the insurance company. A copy of the death certificate must accompany the claim form. The death benefit is then paid out within 30 days.

Significance

The death benefit for a life insurance policy may be paid to your beneficiaries, or it may be kept with the insurance company and invested. Death benefit proceeds are either paid out as a lump sum or as monthly payments. When benefits are left with the insurance company, they are held in the company's general account to earn interest. The general account is comprised of bonds and bond-like investments. These investments are geared toward producing income. Thus, the purpose of keeping life insurance death benefits invested with a life insurer is to generate investment income.

Tax Implications

The advantage of your death benefit is that it is received by your beneficiaries on an income tax-free basis. Your beneficiaries do not need to claim this money on their tax returns, and they may spend the money any way they like. In other words, neither the life insurance company nor the IRS restricts how the money can be used.

Consideration

Before you pass away, you should inform your beneficiaries that there is a life insurance policy in place and they are named on the policy. Additionally, your beneficiaries must determine whether they need regular income payments or they will be comfortable receiving a large, lump sum of money.

References

• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu and Robert A. Crane; 2007
• "Life Insurance"; Kenneth Black, Jr. and Harold D. Skipper, Jr.; 1994
• "Ernst & Young's Personal Financial Planning Guide, 5th Edition"; Martin Nissenbaum, Barbara J. Raasch and Charles L. Ratner; 2004