Death Benefit Planning

Part of planning for the future is planning for the eventual time when we aren’t here anymore. It’s not a comfortable topic, and one we may try to avoid, but tackling questions surrounding death benefits are so very important. It’s a way we can show our loved ones how much we care for them, and a way to leave a legacy to support their future or to fund a favorite cause or passion.

Life insurance is a primary way that individuals plan for death benefits. Pension funds, annuities, and critical illness insurance policies are other ways that individuals might choose to pass wealth on to their beneficiaries. 

By definition, “death benefit” refers to the payout from a life insurance policy. Beneficiaries can be a spouse, partner, child, another relative or unrelated individual, or an organization–anyone the policyholder wishes. There can be one or several beneficiaries. It’s never a good idea to name an estate as the beneficiary, though, as the death benefit sum would then be subject to tax and open to predatory practices by opportunistic individuals. 

Death benefits often cover funerary costs but can also help to cover debt, pay for daily needs, and fund education. Traditional death benefits are not taxed once received by the beneficiary, and there are several ways that they may be received:

  • All cause: Outside of policy exceptions, an all cause death benefit will pay regardless of the cause or timing of death.
  • Accidental: This type of death benefit only pays in the event of a car crash, drowning, or another accident that causes a fatality. Accidental death is typically a rider to a primary life insurance policy.
  • Accidental death and dismemberment: This type of policy pays both for qualifying accidental fatalities as well as for any accident that causes a qualifying, life-altering injury. This is typically a rider to a primary life insurance policy.
  • Graded: This type of death benefit is lower or higher, depending on when death occurs in relation to the age of the policy.
  • Accelerated: In the event of a terminal illness with a short timeline, an accelerated death benefit can allow the policyholder to use some of the funds for medical expenses and long-term care at home. These may also be called living benefits, and if used, total payout to beneficiaries will be lessened.

How you choose to set up the distribution of death benefits in your policy will affect the tax implications to the beneficiary. This is where a certified public accountant can help to make sure that your decision works out the best for the people you leave behind.

Death Benefit Payout Options

In addition to having a death benefit plan in place for your beneficiaries, you’ll want to work with an Ohio CPA to be sure that your plan has a payout method that works best for your needs.

Annuity: The life insurance company will place the death benefit sum into an annuity investment account that will distribute a yearly amount plus interest to the beneficiary for the life of the benefit.

Lump sum: Most often, a life insurance policy will pay beneficiaries in one one lump sum, either via a check or electronic direct deposit.

Installments: Also known as the specific income option, specific life option, or life income option, installments allow the beneficiary to set a payout schedule with the life insurance company. A secondary beneficiary can also be named.

Retained asset account: A lump sum is disbursed to a cash value checking account that can earn interest.

It’s also important to remember that traditional life insurance policies are generally one of two types: term, or whole life. While term policies are only valid for the time period agreed upon by the policyholder and insurance company, a whole life policy has no term limits and is valid until the policyholder passes away. For some term policies, a return of premium benefit option may allow the living policyholder to recover all or part of the premium they’ve paid. They could then reinvest this sum in another policy or choose some other method to provide for beneficiaries.

Death Benefits and Taxation

The above options sound straightforward at first glance, but each has their own set of tax considerations to know about before making a final decision. Oftentimes, interest earned is taxable, and amounts disbursed depend on age and other factors. Working with an experienced, local accountant ensures that whatever decisions you make regarding death benefit planning, unplanned-for tax will never leave beneficiaries without the support they need.

One common way to keep life insurance from being part of your taxable estate is to use what’s called an irrevocable life insurance trust. This step removes ownership from you, instead holding the policy in trust. You can still ensure that premiums are paid and you may retain some legal control over the policy, but it will not be considered as part of your estate upon death. You can name a trusted individual to handle the money if beneficiaries are minor children.

Work With A Trusted, Local Accountant

If you recently began your family and want to ensure their future safety, or if you are rethinking the current plan you have in place, please don’t hesitate to contact us with any questions. At NMS Certified Public Accountants we are honored to help you provide for your loved ones and establish a lasting legacy.

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