No one likes to think about death, but it happens to even the best of us. Many people worry how their family will be financially capable of providing for themselves after they die. To alleviate and address this concern, life insurance is purchased to offer some sense of financial security to loved ones. When the policy holder of an annuity or life insurance policy dies, the amount of the payment made is called a death benefit. It is also called a survivor benefit. The individuals who receive the funds are called beneficiaries.
Death Benefits of Term Life Insurance
There are two common sources of death benefits. If a person receives a pension, their beneficiary may be entitled to 65% of the monthly pension amount. On the other hand, a life insurance policy provides a death benefit in the form of a lump sum payment. The size of the payment is dependent on the type of policy that was held at the time of death.
In terms of life insurance policies, there are two main types that have varying implications upon the way in which death benefits are awarded. Term life insurance is the most popular type of life insurance. Term life insurance provides coverage for a specific period of time. That period of time could be for as little as one year, or up to ten years or more.
The death benefit awarded is for a fixed, predetermined amount. If you purchase a policy, make your premium payments, and outlive it, then you lose all of the money you've invested. A term policy only acts as a safety net, and provides no savings benefits. This is the most popular form of life insurance for people who aren't independently wealthy, simply because it has the lowest premium.
Death Benefits of Permanent Life Insurance
Permanent insurance products offer the opportunity for tax-deferred savings and investment capabilities – provided the premium continues to be paid. In addition to paying a death benefit, permanent insurance products build cash value, and can be utilized as a way to pass wealth on to children and other benefactors. These are popular with individuals looking to do estate planning, or who want a way to force themselves to save money.
There are three variations of permanent insurance. These include:
Whole life insurance – offers set death benefits
Universal life insurance – separates the death benefit from the investment performance, so no matter how poorly your investments do, a guaranteed minimum death benefit will be paid.
Variable life insurance – offers varying death benefits amounts which are based on how well the investment portfolio of the policy performs. This incurs a certain amount of risk, since death benefits will be lower if the portfolio loses money.
Permanent life insurance polices can be very complex, and shouldn't be purchased until all the parameters are fully understood.