What Happens to Life Insurance After the Death of the Policyholder?

18 Aug What Happens to Life Insurance After the Death of the Policyholder?

The main purpose of a life insurance policy is to cater to the financial needs of the beneficiaries listed in the policy agreement. In this article, we will consider what happens to life insurance after the death of the insured.

Collecting Life Insurance Benefits

Usually, the insurance company gives you a claim form after you’ve been notified of the policyholder’s death. However, if this is not the case, you can collect the benefits by sending the original death certificate and the original life insurance policy to the insurer to get paid directly.

Sometimes, the beneficiaries might not be aware of their status before the death of the policyholder. Nevertheless, if this is the case, you can make use of the online services provided by the National Association of Insurance Commissioners (NAIC) to know if your loved one had a policy.

When There Are Multiple Beneficiaries

When there are multiple beneficiaries to a life insurance policy, the money is divided equally, or otherwise, as stated in the agreement.

However, even if one or more of the beneficiaries dies before the policy takes effect, it will not affect the policy. Instead, their share of the death benefits will be passed down to the other beneficiaries. In a situation where none of the beneficiaries survives the insured, the deceased’s estate will take the proceeds.

When Can an Insurer Refuse to Pay?

There are certain situations where the insurer may decide not to pay out the benefits, provided the policy specifically mentions such situations. These include situations where the deceased:

• Committed suicide within the first two years of taking out the policy
• Was a regular smoker
• Regularly engaged in dangerous activities like drag racing and died during  the race
• Died while committing a crime
• Died due to undivulged health conditions, like high blood pressure or cancer. Here, the company must prove that the deceased was aware of the condition while buying the policy.

Tax on Life Insurance Benefits

There are no income tax consequences on life insurance benefits, so the beneficiaries aren’t mandated to pay any tax on the initial proceeds. This is because the Internal Revenue Service does not regard life insurance benefits as income.

However, any interest earned on the proceeds of the policy will be taxable. This usually happens when the insurer does not pay out the proceeds at once but stretches it out over the years. As a result, the remaining balance with the insurance provider grows and attracts payable tax on the interest generated.

The Insured’s Final Bills

The beneficiary is not under any obligation to settle any existing debt the deceased may have incurred. This is because life insurance benefits are not part of the probate estate. Creditors and final bills are rather settled with estate funds or by liquidating estate assets. Nevertheless, if the beneficiary is a co-signer to a loan along with the deceased, he may be required to satisfy the debt.

With a life insurance policy, you can protect your family and loved ones from financial difficulties that may arise after your demise. At Dougherty Insurance, we offer customized life insurance policies to suit your specific needs. Contact us today to get a quote!