Death Benefit Only Life Insurance 

What is Death Benefit Only Life Insurance? 

Permanent Life Insurance provides lifetime protection, as long as you pay your premiums on time. It has a death benefit, and cash value that grows inside the policy over time. 

Permanent life coverage usually cost up to 5-10 times more than the same amount of term insurance protection.

 

How Does Term Life Insurance Work?

Term insurance provides temporary life insurance for a specific duration. If the insured person dies during the policy "Term", the death benefit proceeds are paid out to the "Beneficiary" of the policy.

However, if the insured person is alive when the policy term expires, there is no payout, the insurance coverage ends.

Term life is "Pure Protection". That means it is only a death benefit, with no "Cash Value" or "Savings" feature.

 

That is why term life costs so much less than permanent life insurance. Because you may outlive the coverage, and there is no cash value, just a death benefit.

 

Advantages of Death Benefit Only Coverage

 

• Lower Cost
• Flexibility of Coverage – 10 to 30 years
• Maximum Coverage for Your Budget

 

Disadvantages of Death Benefit Only Coverage

 

• Temporary Protection
• No Cash Value
• You May Outlive Your Life Insurance

 

What is a Death Benefit for Life Insurance?

The death benefit is the amount of money that is paid out when a valid life insurance claim is filed on a policy.  

The death benefit is paid to the stated beneficiaries of the insurance contract, which are chosen by the owner of the policy before the insured person is deceased.  The death benefit can be used by the beneficiaries for any purpose.

If no beneficiaries remain living, or if no beneficiaries are stated in the insurance contract, the full value will normally go to the estate of the insured person.

 

How a Death Benefit Works  

Individuals insured under a life insurance policy that carries a death benefit enter into a contract with a life insurance carrier at the time of application. 

Under an insurance contract, a death benefit or survivor benefit is guaranteed to be paid to the listed beneficiary in the policy, so long as premiums are satisfied while the insured is alive. 

Beneficiaries have the option to receive death benefit proceeds either in the form of a one-time lump-sum payment, or as monthly or annual payments.

Beneficiaries of life insurance policies receive the death benefit payment free of ordinary federal income tax. Proceeds paid through life insurance avoid the process of probate, which ultimately leads to timely payments to survivors.

When is the Death Benefit Paid on Life Insurance?

Normally the death benefit is only paid out when the insurer receives a valid death claim from the beneficiaries of a life insurance contract.  To qualify as a valid claim, the reason for death must not be excluded by the insurance contract.

The life insurance company must have an original death certificate on file and receive properly filled out valid claim paperwork.  When all conditions are met for a valid claim, the insurer must make a timely payout of the full amount to the beneficiaries as required by law. 

The exact amount of processing time between a company receiving all valid claim files and actual claim payout can vary from state to state and company to company, but generally, this will take place within a one to two-month time frame. 

 

Taxation of Life Insurance Death Benefits 

Life insurance death claim benefits are almost never taxable if planned correctly.  This means that generally speaking an insured person can pass along money to heirs without incurring any additional taxes based upon life insurance proceeds.  There are some requirements regarding ownership of the policy before and at the death of the insured for the benefit to qualify as tax-free in some circumstances.

 

Uses of Death Benefits

The most obvious use for a death benefit payment is to replace the lost income of the main breadwinner for a family or loved ones in which an income earning member has passed.  

However, there are many uses for a death benefit.  Life insurance is a very flexible tool that can solve a number of different financial planning needs.  

 

Here are some other common uses of life insurance proceeds:

• Paying for Final Expenses
• Funding College Education for Children
• Paying Off Mortgage Loan
• Maintaining Family Lifestyle
• Paying for Family’s Monthly Living Expenses
• Paying Estate Taxes
• Key Man Insurance for a Company
• Funding a Trust or Passing Liquid Assets to Heirs Tax-Free

 

Amount of Death Benefit Needed

The amount of life insurance death benefit needed is very specific to each individual situation, and should be based on your specific goals you want the life insurance plan to accomplish.  

There is a simple method for determining needs for loved ones in the event of an early passing that we would like to share.

A good, simple calculation sometimes used is calculated as follows.  

Start by taking the income earned by the insured, calculate the total amount that would be lost if the insured person died today and assume he or she will earn the same amount until retirement, and add burial and funeral costs; as well as, lost work time.  

Here is a hypothetical example to illustrate this calculation:

John is 45 years old and earns $50,000 per year.  He is planning on working until he is 65, and burial and grieving costs will be $30,000.  

John has 20 years of earning income until he retires.  

At an earning level of $50,000, multiplied by the 30 years, we can expect that about $1,000,000 of future earnings are now foregone in the case of a death.  

When the $30,000 estimate of burial and grieving expenses are added, we arrive at a figure of $1,030,000.  

A simple calculation of the cost of John’s death to his family is $1,030,000. 

This calculation does not take into account possible raises or career advancements of John, or the reduced income need of the family with one less person, but it is a suitable estimate.

If John compares life insurance premium quotes for this amount, he can find the least expensive life insurance policy that will provide the protection he needs for his family.

The quickest and easiest way to determine your life insurance needs is to use a Life Insurance Needs Calculator.

What is a DBO Death Benefit Only Life Insurance Plan?

Businesses often purchase a death benefit only (DBO) life insurance plan for their employees, especially executives or officers. 

Upon doing so, the company pays the premium on behalf of the employee.  

When the employee dies, the company pays the benefits to the employee’s designated beneficiaries. 

The amount paid is treated as a taxable income on the part of the beneficiaries. 

On the other hand, it is treated as an ordinary business expense on the part of the employer.

 

Death Benefit Only Life Insurance Quotes

 

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