How Will Your Beneficiaries Receive Your Death Benefit?

Everyone knows that the purpose of buying life insurance is to provide a benefit to your survivors. But how do the people you name as beneficiary of your life insurance policy actually receive the funds? For some people who buy life insurance, the thought of a $250,000 check going directly to their loved ones is comforting. For others, it is a nightmare.

The first thing to remember is that you cannot control how the death benefit is paid out unless you make a trust your beneficiary. If you've named individual family members as the beneficiaries of your life insurance policy rather than a trust, then the beneficiaries will determine how they receive the death benefit. If you've chosen multiple beneficiaries, they will each be entitled to choose their own payout option.

Your beneficiaries will have many different options to receive their funds. The payout options should be outlined in your policy and, since this is part of your family's future planning, it is important to take some time to discuss with them the benefits and drawbacks of each payout option. Here are some of the most common options:

1. Lump Sum: A lump sum death benefit works much as you would expect. Once the death claim has been evaluated and approved, a lump sum payment goes out to your beneficiary. If you chose only one beneficiary, that person will receive the entire benefit. If you've chosen multiple beneficiaries, each will receive a check in the amount of the portion for which they are entitled.

2. Interest Income Only: Your beneficiaries may choose to leave the lump sum death benefit with the insurance company and instead only receive a monthly payment of interest that is earned by the lump sum at either a fixed or variable rate. When choosing the interest income option, your beneficiaries will be asked to name a beneficiary to receive the invested funds in the event that they pass away.

3. Life Income: Death benefit proceeds can be treated as an annuity and the life income payout option is one example of this. With the life income method of payout, your beneficiary is guaranteed a certain income for life. When choosing this option, it will be important for your beneficiaries to remember that when they die-even if it's after just one payment-the remaining proceeds will be forfeited. However, if they live long enough they could outlive the death benefit proceeds and still receive monthly payments.

4. Life with Period Certain: Life with period certain works like life income payouts, except that the monthly payouts will be smaller because the insurance company guarantees a certain number of payments-even if the beneficiary dies. In the event of the beneficiary's death, the remaining payments from the period certain will be paid to whomever the original beneficiary chose as their beneficiary.