Life Insurance Death Benefits

Life Insurance Death Benefits can serve as a crucial financial safeguard, ensuring that loved ones remain secure even in the face of life's uncertainties. For many, this protection is about fulfilling a promise to those who matter most, like Arjun, a hard worker.

Arjun had built the perfect life. He worked tirelessly, mapped out every step, and provided for his family everything they could ever ask for. Yet above all else, he needed to ensure that his daughter Aanya's future was safe. From the very moment he took her in his arms, he knew his greatest responsibility was to safeguard her at any cost. What if he wasn’t there to protect them?

From the moment he first held his daughter, Arjun made a silent promise. A vow to safeguard her future, no matter what. That's why, many years ago, he made a choice that would help him in unforeseen circumstances—a decision to purchase a life insurance policy.  He knew that Life Insurance Death Benefits might be the financial safety net his family would require if he were no longer present. It was something he did not only for himself but for Meera, his wife and Aanya, so they would never have to struggle financially, regardless of what life had in store.

But life is full of surprises.

On a rainy evening, on his way back home, fate turned otherwise. Arjun was involved in a fatal accident. It happened suddenly. It was heart-wrenching. And in a split second, the world tilted for his wife, Meera, and their daughter, Aanya.

Now, take a moment to consider—what if life were to throw an unexpected curveball your way? Would your family be financially stable? Would they have enough to pay for day-to-day living, outstanding loans, and future requirements?

For Meera and Aanya, the response was positive. Due to Arjun's planning, they didn't need to concern themselves with survival as they mourned their loss. The Life Insurance Death Benefits provided them with the financial security to maintain their residence, pursue Aanya's education, and proceed without the burden of financial hardship.

Life insurance isn't a policy; it's a vow. A way to say, "Even if I’m not here, you will be financially okay."

Let's break it down and learn how these benefits function—and why they are more important than you realise.

Exploring Death Benefit In Life Insurance

When an individual holding an active life insurance policy passes away, the insurance provider offers a payout to their designated nominee(s). This payout is referred to as the death benefit.

The death benefit is a crucial part of all types of life insurance policies, including term insurance, ULIPs (Unit Linked Insurance Plans), money-back policies, endowment plans, and whole life insurance.

Death benefits act as a financial cushion for the family of the deceased insured, easing their burden of financial liability that includes payments for bills, loans, and several other financial obligations.

The amount of death benefit isn't the same in all cases—it varies according to the type of life insurance policy. It may be:

• A multiple of premium paid annually
• The chosen sum assured at the time of purchasing the policy
• In certain cases, such as participating or linked policies, the bonuses accumulated can also be added to the payout

Even the way in which this money is paid out can differ. The choices may include:

• A lump sum payout
• A regular monthly income, which can either be fixed or increasing with time
• A blend of both

The precise claim payout (death benefit) and procedure are stated in the policy document itself. For this reason, it is critical for the insured as well as their nominee(s) to understand the specifications of the policy in great detail. This ensures that your dear ones are financially safeguarded during such a tough phase.

Comprehending Death Benefits Through Various Scenarios

The simplest way to know how a death benefit works is by observing its impact in reality. To better understand, use the following various illustrations.

Scenario 1: Endowment Plan
Rishi, a bank staff member, invests in an Endowment Plan which has a death benefit of Rs. 70 lakhs for 20 years. The sum assured, along with any additions such as loyalty additions, will be provided in the event of either maturity or death, whichever occurs first. As he has financial obligations, he opts for a lump sum payment and nominates his wife, Sheetal.

Suppose Rishi passes away in the seventh policy year. What will happen next?

Sheetal will be paid the death benefit of Rs. 70 lakhs, along with any accumulated loyalty additions, in a lump sum from the insurance company.

Scenario 2: Participating Money-Back Policy
Yuvan, an IT professional, purchases a Participating Money-Back Policy for a duration of 25 years and with a sum assured of Rs. 50 lakhs. The policy pays survival benefits at regular intervals during its term. By the 5th, 10th, and 15th years of the policy, Yuvan has already received Rs. 30 lakhs as survival benefits.

Now, assume that Yuvan passes away in the 18th year of the policy. What becomes of the death benefit?

Even though he has already received Rs. 30 lakhs as survival benefits, his nominee will  receive the entire death benefit of Rs. 50 lakhs, along with any bonuses that have been built up under the policy. The policy will cease to exist after this payment.

Scenario 3: Participating Endowment Plan
Rahul, a married man and businessman, purchases a Participating Endowment Plan in 2022 with a policy term of 25 years. He decides to pay an annual premium of Rs. 1.5 lakhs for the first 20 years in exchange for a sum assured of Rs. 45 lakhs.

Now, suppose Rahul passes away in the 12th policy year. What follows?

His nominee would get the death benefit, including the Rs. 45 lakh sum assured and any accrued bonuses (regular and/or terminal bonus, as the case may be). What is a regular and terminal bonus? The reversionary or regular bonus is typically announced on an annual basis, with its amount being determined through an actuarial assessment of the insurer's assets and liabilities at the close of the financial year. Once declared, this bonus becomes guaranteed.

 

On the other hand, the terminal bonus is a one-time, lump-sum bonus awarded either at the time of maturity or in the event of death. This bonus is generally based on the insurer's overall investment performance throughout the duration of the policy.

The insurer also offers the nominee a choice—they may receive the payment in a lump sum or instalments at regular intervals.

Case 1: Lump Sum Payout
Here, the nominee gets Rs. 45 lakhs, along with bonuses accrued in 2033. This enables them to receive the entire sum upfront, which can be helpful for meeting significant financial requirements such as settling his home loan.

Case 2: Periodic Instalments
The nominee may elect to receive 25% of the death benefit each year for four years if they prefer smaller, more frequent payouts. Accordingly, they would get Rs. 11.25 lakhs a year from 2033 to 2036, which is 25% of 45 lakhs at the conclusion of the four years. The final payout would also include any accrued bonuses.

Scenario 4: ULIPs

Unlocking the Benefits of ULIP | A Complete Guide to Investing in ULIPs | SMC Insurance

Under Unit-Linked Insurance Plans (ULIPs), the death benefit can be designed in two manners:

• The greater of the Fund Value  or the Sum Assured
• The Sum Assured and the Fund Value

Let us look at an example to understand this.

Dev's ULIP Policy

In February 2022, Dev, aged 40, bought a 20-year ULIP for Rs. 1,00,000 as the annual premium. After charges of Rs. 4,000 are deducted by the insurer, the investible amount is Rs. 96,000 annually.

Dev's intention is to create an education and wedding fund for his son. To secure his family, he makes his wife, Radhika, the nominee. The policy indicates that the death benefit will be the larger of the Sum Assured or the Fund Value at the time of his demise.

Step 1: Determining Total Units Bought

The Net Asset Value (NAV) of one unit when Dev purchases the policy is Rs. 400.

Total Units = (Amount Invested - Charges) / NAV

Total Units = (Rs. 1,00,000 − Rs. 4,000) / Rs. 400

= 240

Step 2: Finding the Sum Assured

If the Sum Assured is 10 times the annual premium:

Sum Assured: 10 x Rs. 96,000 = Rs. 9,60,000

Step 3: Fund Value at Death

Let's assume that in the years gone by, Dev has acquired 900 additional units through premiums. If the NAV at the time of his death is Rs. 500:

Total Units Accumulated = 240 + 900 = 1,140 units.

Fund Value = NAV × Total Units = Rs. 500 × 1,140 = Rs. 5,70,000.

Final Death Benefit Payment

Because the Sum Assured (Rs. 9,60,000) is greater than the Fund Value (Rs. 5,70,000), Radhika, being the nominee, will get Rs. 9,60,000 as the death benefit.

Scenario 5: Term Insurance
Pratik, an entrepreneur in the food business, purchases, let's say, a 30-year term life insurance plan with a sum assured of Rs. 1 crore. In the 10th year, he passed away, unfortunately. His nominee will be paid the death benefit depending on the payout option selected at the time of buying. Here's the process:

1. Lump Sum Payout
In this option, the nominee receives Rs. 1 crore in one shot. This acts as financial assistance that can be provided immediately, making it easier to handle large expenses such as loans or any other urgent monetary needs.

2. Monthly Installments
In this option, the nominee is paid a fixed percentage of the sum assured every month. Suppose the payout is fixed at 1% a month. Then, the nominee will be paid Rs. 1 lakh monthly till the end of the income benefit term.

3. Combination Payout
This choice provides both lump sum and monthly payments. For example, 40% of the total assured (Rs. 40 lakhs) is paid out outright, and the balance of Rs. 60 lakhs is paid out in monthly instalments over five years.

Different payout structures are available to suit different financial needs and aptitudes, providing flexibility when it comes to paying their claim.

How To Select The Best Claim Payout Option For Your Life Insurance?
Selecting the proper death claim amount for your life insurance matters, as it will decide how your family will get the funds after your death. The best choice depends on their financial situation and ability to manage money well.

These are the most popular payout options to reflect on:

Lump Sum Payout
With this choice, the whole claim amount is disbursed to the nominee in one transaction.

• Suitable for: Families that can handle a high amount sensibly or have large financial obligations, e.g., pending loans, to be cleared immediately.
• Considerations: Although it offers immediate access to the entire amount, financial planning is needed to make sure that the money is spent judiciously.

Monthly Income Payout
In this choice, the claim amount is paid out in regular monthly instalments rather than one lump sum.

• Ideal for: Families who are not sure about receiving a large amount of money all at once and would rather have a guaranteed income to take care of day-to-day needs.
• Considerations: This provides long-term financial security, minimising the possibility of exhausting the funds too rapidly.

Lump Sum + Monthly Income

This choice divides the claim payout—a part is paid out instantly, with the remaining paid out in monthly instalments.

• Best for: Families who require instant money for immediate spending, like loan payments or large expenses, but also need continued income to help take care of household costs.
• Considerations: It provides an even balance, offering immediate financial reprieve and long-term fiscal security to the nominee.

Which Death Claim Payout Option is Best for You?

The most favourable payout choice will depend on your nominee's financial management capabilities and financial needs after you pass away.

• If they are not ready to handle a lump sum, a monthly income payout will be a better option.
• If your loved ones have heavy debts or urgent needs, a lump sum claim settlement may be a better option.
• The lump sum + monthly payments form provides an equilibrium way of having both instant financial help and long-term security.

Take the time to evaluate your family's financial condition and select a payout option which will provide for their financial security and well-being.

What Kind Of Deaths Are Covered?

Life insurance is supposed to help your loved ones financially in the event of your death. But in what particular situations does a policy provide coverage? Let's have a closer examination of the usual scenarios.

Important Note: This is not a complete list. The situations covered can vary based on the specific terms of your life insurance policy. Depending on the policy details, death benefits may be paid in other circumstances as well.

Exclusions In Life Insurance Death Benefits

The primary exclusion of life insurance is suicide in the initial policy year. If the insured passes away from suicide within a period of 12 months from the policy issuance, the insurer does not pay the complete death benefit. Instead, the nominee receives a refund of part of the premiums paid over that time. In other instances, if the policy is still in force, the insurer can pay either the surrender value (if any) or the amount of premiums paid, whichever is greater.

But what if suicide happens after the first year?

After the second year, life insurance policies cover death due to suicide.

Moreover, if you have purchased riders for your life insurance, be aware that they could include exclusions. While normal life insurance covers death due to drunkenness, criminal acts, or dangerous expeditions, riders cannot. For instance, an accidental death benefit rider could exclude coverage in the event the insured passed away in an accident that occurred due to consumption of alcohol.

Hence, it is important to thoroughly go through the conditions of your primary policy as well as any additional riders, to know in detail what is included and what is excluded.

Tax Exemptions On Life Insurance Death Benefits

Life insurance plans also offer tax advantages under Section 10(10D) of the Income Tax Act. The tax benefits are provided on:

• Death benefit paid to your dependents in case you pass away within the policy period.
• Maturity benefit paid when the policy term expires.

This holds good for all types of life insurance plans like ULIPs, money-back policies, retirement plans, child insurance policies, endowment policies, and term insurance.

In India, the life insurance death benefit is fully tax-exempted under Section 10(10D). It is tax-exempted with no taxes charged to your nominee for the money received.

Typically, tax benefits under this section have a specific premium-to-sum-assured ratio. But death benefits are exempt from this rule. Irrespective of the premium-to-sum-assured ratio, the entire amount of the death benefit is exempt from tax for the nominee.

Also, any bonuses that are paid in addition to the death benefit are exempt from tax. This way, life insurance not only gives financial security but also protects your family from tax liabilities during hard times.

Steps To File Claim For Life Insurance Death Benefits

Filing for a life insurance death benefit by your nominee(s) is an important step after the unfortunate incident of your passing away. This is how the process goes:

1. Inform the Insurer
The initial step is to notify the insurance company of the unfortunate incident. This will initiate the claims process. Your nominee may do this via different mediums like phone, email, SMS, online platforms, or by physically visiting a branch office.

2. Provide the Necessary Documents
Your nominee has to fill up the claim form and attach the necessary documents. The insurer will give a system-generated acknowledgement receipt after submitting the paperwork. Your nominee should also retain soft copies of all the documents for reference in the future. The insurer will review the documents and begin processing the claim.

3. Submit Additional Documents (If Requested)
In some instances, the insurer can request additional documents to process your claim. Such requests will often be sent through email or other formal avenues. It's necessary that your nominee submit the required documentation on time in order to avoid delays. The following is what they might be requested to submit:

• Important Documents:
  • Self-attested copy of the death certificate
  • Filled claimant statement form
  • Nominee's bank account details
  • Self-attested copy of the nominee's KYC documents
• Other Documents for Claims Within 3 Years:
  • Medical attendant's certificate (if relevant)
  • Original policy document
  • Employer's certificate (if applicable)
  • Self-attested copies of the hospital or treatment records (if available)
• Other Documents for Accidental or Unnatural Deaths:
  • FIR and final police closure report
  • Driving license (if the insured passed away while driving)
  • Postmortem report
  • Valid motor vehicle insurance document (in case of death due to road accident)
  • Police inquest report or inquest panchnama
  • Newspaper clipping (if available)

Submission of these documents in time ensures a hassle-free and efficient claims process.

4. Claim Approval and Payout
After your nominee provides all the documents, the insurance firm thoroughly checks them to confirm their correctness. Incorrect information may result in claim rejection, and hence, accuracy is important.

When the claim is approved, the insurer will make the payout based on the choice you made at the time of purchasing the policy. This may be a lump sum amount, regular income, or a mix of both.

A hassle-free claims process relies on proper and comprehensive documentation, which ensures your nominee gets the benefits without undue delays.

Major Factors That Impact Life Insurance Death Benefits

Knowing what impacts the life insurance death benefit can make sure your family gets the money they deserve. Below are key considerations that will determine how the death benefit is calculated and paid out:

• Type Of Policy: The type of life insurance you opt for—term, whole life, endowment, or ULIP—has an effect on the structure of the death benefit. For example, term insurance generally offers a greater life cover than other policies. Some policies also have bonuses that can affect the ultimate payment. Participating and linked life insurance policies may have non-guaranteed or guaranteed bonuses, which determine the entire amount that has to be paid.
• Sum Assured: The sum assured that is chosen by you is the assured amount payable to your nominee in case of your death. The more the sum assured, the greater the death benefit.
• Policy Riders: Other riders such as accidental death, critical illness, or terminal illness riders can affect the death benefit in certain situations. For instance, under an accelerated terminal illness rider, part of the sum assured is paid early if you are diagnosed with a covered terminal illness. The remaining amount is given to your loved ones after your passing, which directly decreases the death benefit your nominee is eligible to receive.
• Policy Loans: If you have borrowed against your life insurance policy, any outstanding loan balance with interest will be subtracted from the death benefit prior to being paid to your nominee.
• Policy Lapse or Surrender: If you surrender the policy or let it lapse by stopping premium payments after paying for a specified number of years, the death benefit may be forfeited, reduced, or converted into a paid-up sum, depending on the terms of the policy. In the Reduced Paid-Up option, your death benefit will be reduced in proportion to the premiums you have paid compared to the total premiums due during the premium payment term. Typically, the regular bonuses accumulated up to the due date of the first unpaid premium will not be reduced. However, any bonus payable in the year of premium discontinuance will be proportionately adjusted based on the unpaid premiums for that policy year. Additionally, no further bonuses will accrue under the policy.
• Exclusions: There are certain situations that will deny or limit the payout. For instance, in case of death due to exclusions mentioned in the policy—like suicide within the initial policy year or certain exclusions under riders.
• Claim Process Compliance: Prompt filing of correct documentation is important. Errors or delays in the claim process may delay or affect the payment of the death benefit.

Myths Surrounding Life Insurance Death Benefits

Most individuals have misconceptions about the way life insurance death benefits are paid, and this can cause confusion at a very important moment. Let's dispel some of the most prevalent misconceptions:

Purchasing the Best Life Insurance Policy Online from SMC

With too many choices at hand, deciding on the perfect life insurance policy can be confusing. But with SMC, it is easy and convenient. Here's how you can locate and buy the best life insurance policy online in a few easy steps:

• Visit the website of SMC Insurance.
• Click on 'Life Insurance' to proceed.
• Enter your information, such as gender, full name, date of birth, and mobile number.
• Provide a few lifestyle questions, for example, smoking status, annual income, desired cover amount, and policy term.
• Click on 'Compare Quotes' to view available life insurance policies.
• Personalise your policy by modifying details like coverage amount, term, and premium frequency to determine how the premium varies.
• Download brochures to read more details regarding various plans.
• After deciding on the policy, click on 'Buy Now' and apply.

Wrapping It Up!

Life is uncertain, but financial preparedness can change everything. Life insurance death benefits keep your loved ones financially secure when you're no longer around. With the right policy and payout option, you give them the stability and peace of mind they require in times of need.

Planning ahead ensures that your family won't be left without financial support in the event of an unexpected tragedy. It's about leaving a legacy of security and comfort for your family so that even after your departure, your family can have the means to carry on. Being aware of your options and making the right choice today can protect your loved ones tomorrow.

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