In life insurance, death benefits serve as one of the critical forms of financial protection for your loved ones in case of your untimely death. It makes life insurance a reliable financial tool to secure your family’s future.

However, understanding the features of this death cover component is essential to ensure your family’s financial security. Keep reading to learn about the scope of coverage, payout options, and how to claim a death benefit during adverse times.

What is a Death Benefit?

Death benefit refers to the ‘sum insured amount’ that is given to the insured’s nominees or beneficiaries in the event of their untimely death during the policy tenure. This payout is usually released within 30 days of the claim if the application is submitted correctly.

The insured may choose the type of death benefit payout for his family. The choice should be made based on the beneficiaries’ financial situation and their money management abilities.

What are the Types of Policies that Offer Death Benefits?

All types of life insurance policies provide a death benefit to beneficiaries if the insured dies during the policy term.

Here are the main types of policies:

1. Unit Linked Insurance Plans (ULIPs)

These are hybrid plans that combine investments with insurance, which offer death benefits along with market-linked returns. In the event of the insured individual’s death, the beneficiaries will receive the greater of the fund value and the sum insured.

2. Endowment Plans

These plans can be seen as traditional savings cum insurance plans that offer death benefits. It also offers bonuses (if applicable) to beneficiaries upon the policyholder’s death during the policy term.

3. Term Plans

Term insurance plans are often referred to as pure protection plans that offer higher death benefit coverage at lower premium rates. However, these insurance plans don’t offer any maturity benefit if the insured individual survives the policy term.

4. Whole Life Insurance Plans

These plans offer coverage for up to 99 or 100 years, guaranteeing death benefits regardless of when the insured passes away. Whole life insurance plans are ideal for legacy planning.

5. Retirement or Pension-based Plans

Some of the annuity or retirement plans also provide life cover during the accumulation phase. The nominee is entitled to receive a death benefit payout if the insured individual dies before vesting.

Key Death Claim Payout Options You Should Know About

Opting for adequate life insurance coverage is essential to ensure your loved ones are financially protected. However, selecting the life insurance death benefit payout option to support their financial needs is even more important.

Here are the payout options you can opt for:

• Lump Sum Payout

Under this option, the entire claim amount is disbursed to the nominee in a single payment. However, it is suitable only if the beneficiaries have significant financial obligations to clear, such as pending loans, or if they are judicious in their financial planning.

• Monthly Income Payout

Under this payout option, the sum insured is paid in monthly instalments rather than a lump sum. It is ideal for families who don’t have any huge financial commitments to clear off, and it brings stability for the nominee by offering a fixed monthly income.

• Combination Payout

It is a hybrid option in which a portion of the claim amount is paid in a lump sum, and the remaining amount is paid in monthly installments.

It supports the family in covering large financial expenses, such as bills or loans, and also provides a monthly income to cover general household expenses.

Tax Implications on Life Insurance Death Benefits

In the event of the unfortunate death of the insured individual, the beneficiary receives death benefits that are tax-free under Section 10 (10D). The policyholder is also entitled to claim tax benefits on the life insurance premiums paid. 

Section 80C of the Income Tax Act, 1961, allows a deduction of up to ₹1,50,000 per year on the amount of premiums paid. It is crucial to understand exclusions, policy terms, and the nominee claim process for life insurance to receive death benefit payouts.

Types of Deaths Covered & Not Covered Under Death Benefits in Life Insurance

When buying life insurance, it is essential to understand the circumstances under which the nominee is eligible to receive death benefits. Certain types of death are excluded from life insurance cover, where the beneficiaries are not eligible to receive death benefits.

Refer to the table below:

How are Death Benefit Payouts Helpful for Indian Families?

Death benefit payout provides a financial safety net to your loved ones in your absence. Here are ways in which it helps the families after the death of the insured individual:

• Immediate Financial Support

The proceeds of the death benefit payout provide immediate financial support to the insured individual’s family members or dependents.

If the insured individual was the family’s sole breadwinner, the policy replaces his lost income, helping the family maintain their daily expenses.

• Supports Wealth Creation

Certain life insurance policies, such as ULIPs, also allocate a portion of the premium to equity and debt funds to generate higher returns over the long term. It supports long-term financial goals such as children’s higher education, marriage, or asset creation.

• Assists in Debt Repayment

The death benefit payouts can be used to repay any outstanding debt, such as home or personal loans, in the event of the insured individual’s unexpected death. It reduces the financial burden on the family or dependents during these adverse times.

• Brings Peace of Mind

Death benefit cover in life insurance provides peace of mind both to the insured and their family members. It financially protects the dependents in the insured’s absence, and they can also rest easy knowing their loved ones will be taken care of.

Death benefit payouts under life insurance provide financial protection to your loved ones in case of your untimely death. However, proper awareness of the exclusions and the claim process is essential to avail of these payouts.

Therefore, it is crucial to ensure the nominee understands the policy terms and payout options in the event of adverse circumstances.