Everything can change in an instant. A young girl walked into a cafe and ordered a croissant. Just as she walked to her table, she saw a young man looking at her. They shared a smile, and that moment was enough! They started talking and, after years of dating, eventually got married! This is why people often say that a fresh start, a heartbreaking goodbye, or a dreadful accident- anything can happen in a blink of an eye.
But what if something unfortunate happens? Wouldn't it be comforting to know that you can keep providing for your loved ones, even after you're gone?
This is where most people buy a life insurance policy to be financially supportive of their family, even when they cannot be around physically. The assurance that your dear ones will have a safety net in times of need is what life insurance is all about. When talking about life insurance, the phrase "death benefits" may sound heavy, but it really refers to a promise of stability and financial support. Money is the last thing anyone wants to think about while they are grieving. But we often need to deal with it.
This is what happened in Fahad's life. As a young father of two, he was always concerned about what might occur if he weren't there for his family. And so as a solution, he decided to buy a life insurance policy. Let’s take a closer look at how this life insurance policy became the cornerstone of his family’s financial security.
One day, the clock was ticking at 9:45 am, and Fahad knew he was late for work. He had his coffee and breakfast in a hurry, kissed his wife and kids, and left for work. But little did they know that it was the last kiss. He met with a very tragic accident that very day and passed away.
Despite the tragedy, his policy's death benefits made sure his children continued with their education and relieved his wife of the burden of paying the expenses.
Knowing life insurance's death benefits is more than just a formality; it's about making sure your loved ones are taken care of, your obligations are paid off, and your aspirations remain achievable even during difficult circumstances.
So, what exactly do you need to know in order to feel prepared for this?
In the article that follows, we'll go over all you need to know about life insurance's death benefits, step by step.
What is a Death Benefit in Life Insurance?
In life insurance, a death benefit is an amount paid by the insurance company to the beneficiaries of the insured after their passing. This is provided if the policy was still in effect at the time of death. For the insured's loved ones, this payout serves as a safety net, helping them pay bills, settle debts, or fulfil other financial obligations.
Depending on the plan, the death benefit may be a multiple of the yearly premium or the sum assured chosen at the time of policy purchase. Accumulated bonuses might potentially be included in the payout under certain conditions.
The death benefit is a crucial component shared by all life insurance types, including whole life insurance, term insurance, endowment, money-back policies, and ULIPs. It promises beneficiaries' financial stability in the event of the insured's passing.
But how is the death benefit disbursed?
It can be structured in different ways: a lump sum, monthly income (either fixed or increasing), or a combination of both. However, the policy's provisions determine the precise payout schedule.
Another important fact is that it is essential that both the insured and their beneficiaries understand the specifics and available options regarding death benefits. After all, understanding how it operates will ensure that your loved ones receive adequate support during their most trying times.
How Death Benefit Works with Example
You can see the death benefit's actual impact by comprehending how it works. To clarify, let's look at two situations:
👉Scenario 1: Endowment Plan
Rishi is a bank employee who invests Rs. 70 lakhs in an Endowment Plan that provides coverage for 20 years. This sum will be paid out if he passes away or the policy matures, whichever comes first. He designates Sheetal, his wife, as the nominee.
Let's say Rishi passes away during the seventh policy year. What happens next? Sheetal will receive a death benefit of Rs. 70 lakhs from the insurance firm. Despite the policy not reaching maturity, this guarantees that the financial security he was hoping for will be provided to his family.
👉Scenario 2: Participating Money-Back Policy
Yuvan works in the IT field and purchases a Participating Money-Back Policy for 25 years with a sum assured of Rs. 50 lakhs. Throughout the policy term, this plan provides survival benefits as recurring payments. By the 5th, 10th, and 15th policy years, he has already received Rs. 30 lakhs in the form of survival benefits.
Let's now assume that Yuvan passed away in the 18th year of the policy. How is the death benefit dealt with? His nominee will receive the full death benefit of Rs. 50 lakhs, plus any bonuses collected under the policy, regardless of the Rs. 30 lakhs already paid as survival benefits. Following this, the policy expires.
👉Scenario 3: Participating Endowment Plan
Rahul is a married businessman who purchases a Participating Endowment Plan in 2022 with a 25-year policy term. He decides to pay Rs. 1.5 lakhs as the annual premium for the first 20 years, with a sum assured of Rs. 45 lakhs.
Let's now assume that Rahul passes away in the 12th year of the policy. The death benefit, which includes the sum assured of Rs. 45 lakhs plus any accumulated bonuses, would be paid to his nominee. Most importantly, the insurer gives the nominee the flexibility to decide whether they would prefer to receive this sum in periodic installments or as a lump sum.
Let’s get an idea of how each option would work-
- Case 1: Lump Sum Payout
Along with the accumulated bonuses, the nominee would receive Rs. 45 lakhs in 2033. With this option, you can access the entire money straight away, which could be ideal for addressing large financial needs.
- Case 2: Periodic Installments If the nominee would rather receive smaller, more frequent payments, they can choose to get 25% of the death benefit per year for four years. The nominee would get Rs. 11.25 lakhs a year from 2033 to 2036, which is 25% of Rs. 45 lakhs.
- If the nominee would rather receive smaller, more frequent payments, they can choose to get 25% of the death benefit per year for four years.
- The nominee would get Rs. 11.25 lakhs a year from 2033 to 2036, which is 25% of Rs. 45 lakhs.
The entire payout, plus any accumulated bonuses, would still be Rs. 45 lakhs at the end of the four-year period.
👉Scenario 4: ULIPs
The death benefit in Unit-Linked Insurance Plans (ULIPs) can be set up in two different ways-
- The Fund Value or the Sum Assured, whichever is greater.
- the Fund Value plus the Sum Assured.
Let's use an example to better illustrate and comprehend this-
In February 2022, Dev, who is 40 years old, bought a 20-year ULIP. His yearly premium is Rs. 1,00,000, and the investable amount is Rs. 96,000 after the insurer deducts Rs. 4,000 in charges. Dev wants to make sure he has enough funds for his son's wedding as well as his education. He designates his wife, Radhika, as the nominee for this policy.
Depending on which is greater, the policy specifies that the death benefit will be equal to the Sum Assured or the Fund Value on the date of death.
Let’s break it down-
Calculating the Total Units
The Net Asset Value (NAV) of the units on the day of policy purchase is Rs. 400.
Total Units = (Amount Invested - Charges) / NAV
Total Units = (Rs. 1,00,000 − Rs. 4,000) / Rs. 400
Sum Assured
Assuming that the Sum Assured is ten times the yearly premium, the calculation gets to-
Sum Assured: 10 x Rs. 96,000 = Rs. 9,60,000
Fund Value at Death
Let's assume that Dev accrues 900 more units from subsequent premium payments. If the NAV was Rs. 500 when he passed away:
Total Units Accumulated = 240 + 900 = 1,140 units.
Fund Value = NAV × Total Units = Rs. 500 × 1,140 = Rs. 5,70,000.
As the nominee, Radhika will receive Rs. 9,60,000 as the death benefit because the Sum Assured (Rs. 9,60,000) exceeds the Fund Value (Rs. 5,70,000).
👉Scenario 5: Term Life Insurance
Let's say Pratik, a food entrepreneur, buys a 20-year term life insurance policy with a Rs. 1 crore sum assured. Unfortunately, he passed away in the 10th year of the policy. In this case, the nominee will receive the death benefit from the insurer in accordance with the payout structure chosen.
Payout Options
- Lump Sum: This provides instant financial support for significant bills or debts by giving the nominee the full Rs. 1 crore all at once.
- Combination Payout: The nominee may decide to get Rs. 50 lakhs up front, with the remainder sum being paid out each month.
A balanced approach is offered by this dual structure-
- The lump sum covers immediate expenses like loan repayments or medical bills.
- For recurring costs like schooling, household expenses, or other essentials, the monthly income guarantees financial stability.
What is Covered under Life Insurance Death Benefits?
The purpose of life insurance policies is to support your family financially in the sad event of your demise. However, under what particular conditions are deaths covered in life insurance? Let's examine the typical situations-
➡️Death Due to Natural Causes
Are you unsure if natural death is covered by life insurance?
It does, indeed. If death occurs due to old age, any illness, etc., it is classified as a natural death, and the insurer will process the claim accordingly.
➡️Deaths Related to Accidents
Accidental deaths are covered by life insurance as well. No matter where an accident happens, be it at home, at work, on vacation, or even during a memorable space voyage, etc.—it is covered by life insurance.
➡️Death Resulting from Adventurous Activities
Do you enjoy challenging activities like paragliding, scuba diving, or bungee jumping? The insurer will honour the claim and give your family the death benefit if such an activity results in your death.
➡️Death Associated with Intoxication
Will you get benefits even if you use drugs, alcohol, or narcotics? Yes, life insurance policies cover intoxication-related deaths as well.
Note: If the individual was a smoker, alcoholic, or consumed any intoxicating substances at the time of purchasing the life insurance, it is mandatory to disclose this information during the underwriting process. Failure to do so may result in the rejection of the claim if the cause of death is related to intoxication.
➡️Death from Illegal Activities
Your family's claim will still be honoured if you pass away while engaging in illegal activity.
➡️Deaths from Man-Made or Natural Disasters
Whether it's man-made calamities like war or terrorism or natural disasters like floods or droughts, life insurance policies include these scenarios in their coverage.
Important Note: This is not a comprehensive/exhaustive list. Depending on your policy, life insurance may pay out death benefits in different circumstances as well.
What is not covered under Life Insurance Death Benefits?
There is only one major exclusion from life insurance: suicide fatalities. However, this is only applicable during the first policy year.
The policy will not cover suicide deaths that take place within the first 12 months from the date of policy issuance. According to the terms and conditions, the insurer usually pays your nominee for a portion of the premiums you paid during the first year in these situations. In some cases, if the insurance is still in effect, the insurer will pay the surrender value of the policy or the premiums paid up to that point, whichever is greater.
But what if the suicide happens a year later?
Beginning in the second year of the policy, suicide fatalities are covered. If you’ve added riders to your life insurance, it’s important to understand that certain types of deaths may not be covered by these riders. For example, while life insurance plans typically cover deaths caused by intoxication, involvement in illegal activities, or participation in adventurous activities, such scenarios might not be included under the coverage provided by the riders you’ve selected.
To help illustrate and comprehend this, here is an example-
Arjun purchased an accidental death benefit rider worth Rs. 50 lakhs and a term insurance policy for Rs. 1 crore. He unfortunately passed away while bungee jumping a few years later, but his term insurance policy was still in effect. Although the accidental death benefit rider he added did not cover death from adventure sports participation, the term insurance policy does. Thus, his family will not receive the Rs. 50 lakhs from the rider, but they will receive Rs. 1 crore from the term insurance policy.
All in all, it is vital to carefully review the policy terms of both your life insurance plan and any riders you choose to ensure you understand the types of deaths that are covered and excluded under each.
Tax Saving on Death Benefits of Life Insurance Policy
Life insurance policies will also give you tax benefits under Section 10(10D) if you receive-
- Death benefits, which is a payment to your family in the event that you pass away during the policy's term, or maturity benefits, which are paid out at the end of the policy's term.
- ULIPs, money-back plans, retirement policies, child insurance policies, endowment plans, term insurance, and more are included in this category.
In India, the death benefit from a life insurance policy is not subject to taxes under Section 10(10D) of the Income Tax Act, 1961. This implies that your loved ones, regardless of the amount of the death benefit, will not be required to pay taxes on it.
Generally, a specific premium-to-sum-assured ratio is necessary to qualify for tax benefits under Section 10(10D). Death benefits from life insurance, however, are exempt from this. Therefore, the entire death benefit amount is tax-free for the beneficiaries, regardless of the premium-to-sum-assured ratio.
Under this section, even bonuses paid after the insured's death are tax-exempt. This means that your life insurance offers your family tax benefits in times of need in addition to financial security.
Importance of Updating Nominee Details
It's necessary to update the nominee information in your life insurance policy. Why? Since it guarantees that there are no administrative or legal obstacles in the process of the death benefit reaching the appropriate recipient.
This is why it's important -
- To Identify Beneficiary Accurately: It ensures that, in the event of the insured’s passing away, the rightful beneficiary will get the payout.
- To Update Life Changes: The policy should take into account life events such as marriage, the birth of a child, or the death of a previous nominee.
- To Avoid Any Disputes: Keeping the nominee's information updated lowers the likelihood that family members may argue or cause delays in the claim procedure.
- To Ensure Legal Clarity: It guarantees that the individual adheres to policy specifications while maintaining legal clarity.
By routinely checking and updating your nominee information, you protect your loved one's financial future and make sure that their needs are fulfilled.
How to Claim Life Insurance Death Benefits?
Here are the steps involved in the Life Insurance Claims Procedure in the event that the insured person passes away-
▶️Notify the Insurer
The first step is notifying the insurance company of the tragic event. As a result, the claims procedure begins. Your nominee may contact the insurer by phone, email, SMS, online, or in person at a branch office.
▶️Send in the Required Documents
Your nominee must submit the claim form and any additional required documentation. Once the required documentation is submitted, the insurer must provide a system-generated acknowledgement of receipt. It is advisable for your nominee to retain a scanned copy of all submitted documents for future reference. The insurer will then review the documents and initiate the claim processing.
▶️Submit Additional Documents If Needed
Your nominee can at times be asked for more paperwork by your insurance company. Email or other contact channels will usually be used to convey these requirements. During such circumstances, timely submission of pertinent documentation is crucial.
This is what your nominee may be required to give-
Mandatory Documents:
- Death certificate (self-attested copy)
- Claimant statement form
- Bank details of the beneficiary
- KYC document of the beneficiary (self-attested copy)
Additional Requirements for Claims within 3 Years:
- Medical attendant’s certificate (if applicable)
- Original policy document
- Employer’s certificate (if applicable)
- Self-attested copies of the hospital or treatment records (if any)
Additional Requirements for Claims in Case of Accidents or Unnatural Death:
- FIR and final police closure report
- Driving license, if there’s a death while driving
- Postmortem report
- Valid vehicle insurance document (in case the cause of death was a road traffic accident)
- Police inquest report/inquest panchnama
- Newspaper cutting (if available)
Prompt submission of the necessary paperwork allows the claims procedure to move ahead effectively.
▶️Claim Approval and Payout
The insurance company carefully examines all of the necessary paperwork submitted by your nominee before determining whether to accept or deny the claim. Here, accuracy matters most because any inaccurate information in the documents could result in the claim being denied.
In accordance with the payout option you chose when you bought the policy, the insurer will pay the claim amount to your nominee if it is approved. Simple, isn't it? Making sure that all documentation is right and comprehensive facilitates a seamless process.