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Life insurance provides families with money at a time when they need it the most. Beneficiaries can use life insurance death benefits, both from term life insurance and permanent life insurance, however they wish.

How soon will my beneficiaries receive the life insurance death benefit?

The life insurance company will not automatically know that one of their insured clients has died. Your beneficiaries will need to send in a claim form along with a death certificate. The life insurance company will then pay the death benefit within a few days of receiving the claim.

» Learn more: How to File a Life Insurance Claim

If you, the insured, die within the contestability period, this is often the first two years of the life of the policy, paying the death benefit may take longer if the insurance company thinks it’s prudent to investigate the accuracy of the information you put on your application.

Families should rely on emergency funds if they need money immediately following the death of a loved one. While life insurance companies do make every attempt possible to pay the claim quickly, it’s not instantaneous.

The Use of Life Insurance for Daily Living Needs

Term life insurance is most commonly known as income replacement. The death benefit from a term life insurance policy replaces the income that was once provided by a now deceased spouse or parent.

» Compare: Term life insurance quotes

You buy life insurance to protect your loved ones to ensure they can continue living as they always have. This means you’ll want to buy enough life insurance that will allow them to continue paying the mortgage, car payments, internet and cable TV bills, school athletic programs, gym memberships, etc.

Even if the household budget does need to be trimmed after the death of a provider, life insurance can ensure it at least does not need to happen immediately. Perhaps your children go to a private school. If a parent dies without life insurance, can the surviving parent afford the private school tuition on one income or will the children need to be transferred to a public school? This abrupt change in a child’s life along with the death of a parent would be devastating. Life insurance can help keep your family’s standard of living unchanged, at least for a little while, as they decide what can be adjusted and what should remain the same.

The Use of Life Insurance for Final Expenses

Do you want to be buried or cremated? Your wish comes with certain costs. The average cost of a casket alone is over $2,000 whereas cremation is a few hundred dollars. Neither of these estimates includes memorial or funeral services which can consist of expenses for venue rental, music, flowers, food, etc.

Burial or cremation expenses are not the only costs associated with a death, however. You will also need to consider the fact that you may incur medical expenses prior to your death. If you have any debt, creditors will also be knocking on the door after your demise.

Using Life Insurance to Protect Your Family from Medical Expenses

According to Stanford School of Medicine, 60% of Americans die in acute care hospitals and 20% in nursing homes. Deductibles, coinsurance, and co-payments not covered by your health insurance can leave behind a lot of bills. Creditors will go after assets in your estate in an attempt to be paid, which means less going to your heirs. Life insurance can replace these funds your loved ones may have been counting on.

Using Life Insurance to Protect Your Family from Your Debt

As I mentioned a moment ago, creditors can go after assets in your estate if they are owed money. This process happens in probate. The cost of probate can vary but often includes court fees, representation fees, attorney fees, and appraisal fees. Certain debts and taxes are paid from the estate and anything left over is distributed to your heirs/beneficiaries.

The life insurance death benefit you leave behind cannot be touched by creditors or debt collectors though. Life insurance is exempt from probate and will go straight to your beneficiaries.

The Use of Life Insurance for Emergency Repair or Replacement

What happens if you die in a car crash or a house fire? What vehicle will your family drive? Where will your family live? Although your car and house are both likely insured, life insurance will pay a claim typically much faster than a property insurance claim. Your family can use the life insurance death benefit to purchase a replacement vehicle or rent temporary housing.

If you have permanent life insurance that accumulates a cash value and you are in a car accident or house fire, but don’t die, your life insurance policy even provides access to quick emergency funds if needed.

The life insurance death benefit you leave behind cannot be touched by creditors or debt collectors.

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Who Can Benefit from Life Insurance?

If you have a partner or children, these people obviously benefit from you having a life insurance policy. If you died suddenly, they will need financial support.

While those who provide an income for the family need life insurance, stay-at-home parents need life insurance too. This person’s death will increase the costs of the surviving spouse. A single parent will have to pay for child care and transportation, and domestic activities that were previously taken care of by the stay-at-home parent.

If you’re caring for an aging relative, such as a parent with Parkinson’s disease, this person also benefits from your life insurance. If you’re their sole caretaker, what happens if you suddenly died? The death benefit can be used to hire in-home care providers or care in an assisted living community.

» Calculate: Life insurance needs calculator

Life insurance provides peace of mind for both you and your loved ones, but, with the right design, there are other benefits you can receive while you’re living. A term life insurance policy with a living benefit rider allows you to access a portion of your policy’s death benefit if you’re diagnosed with a terminal illness. This rider is usually called an accelerated death benefit rider and free of charge on most policies.

For example:

You purchase a $500,000 30-year term life insurance policy. Ten years later doctors find a malignant tumor on your spine and you’re given seven months to live.

Your policy allows you to receive up to 60% of your death benefit if you became terminally ill. You decide you’d like to take your family on a vacation to spend quality time together.

You withdraw 10% of your death benefit and the insurance company sends you a check in the lump sum of $50,000 minus a $100 administrative fee.

The $50,000 is subtracted from your total death benefit. When you die, your beneficiaries will then instead receive $450,000.

Owning a permanent life insurance policy with accumulating cash value and/or dividends can also benefit you while you’re alive. You have the option to borrow against your cash value in the form of policy loans. If you earn dividends, you can choose to accept payment in the form of cash.

For example:

John, 65, has a whole life policy with a face amount of $500,000 and an accumulated cash value of $142,315. His wife Jane, 63, has Alzheimer’s and he wants to move her to the luxury memory care facility a few blocks from their house. The facility is quite expensive so he decides to take out a loan from his whole life insurance policy in the amount of $100,000. This loan has a 5% interest rate.

John is not required by the life insurance company to pay back his loan in any certain amount of time. When he dies and if the loan has not been paid back, the insurance company simply deducts the balance remaining on the loan plus interest from the $500,000 death benefit before paying John’s beneficiaries.

Different families have different life insurance needs. As a recap, here are some of the most common ways beneficiaries use life insurance death benefits:

  • Replace the income of a deceased provider
  • Pay off the mortgage loan
  • Contribute to children’s college tuition savings
  • Pay deceased’s final expenses

The type of life insurance you buy (term life insurance or whole life insurance) is dependent on your needs, lifestyle, and budget. If you have loved ones relying on you, don’t wait to get life insurance. Get a term life insurance quote or whole life insurance quote now and start the process.

» Learn more: Your Guide to Term Life Insurance vs Whole Life Insurance

 

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Writer, Editor, and Co-host of Quotacy's Q&A Fridays

Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.