In recent months, Bloomberg, The Wall Street Journal and other publications have decried how insurance companies are adding death benefits to beneficiaries via checking accounts that earn interest instead of a payout in a lump sum. However, this statement may actually be a gross misinterpretation of the true events regarding the payout of a life insurance death benefit.
Life insurance death benefit beneficiaries are paid according to the insured’s preference in a life insurance death benefit. Life insurance beneficiaries can usually select a check for the proceeds, in which case the person receives the amount once the paperwork is done. In fact, this can often happen in a matter of days. Many beneficiaries, up to 90% according to Gen worth, prefer the lump sum payout for a death benefit life insurance policy. Find answers to more life insurance questions here.
Life insurance beneficiaries generally then take this money and put it into a checking or money market account or savings account. However, at the rate offered today, the interest earned may be likely to be small. Also, they usually need time to process and figure out what they need to do. Having the money available and liquid is generally the right decision so that they can make the right choice for themselves when ready.
In fact, no beneficiary has typically lost a death benefit due to financial mismanagement via a checking account in an insurance company. With regard to a life insurance death benefit, the beneficiary may be able to pull the money out anytime without any fee or penalty or surcharges.
Why then is this considered a bad deal? The answer lies in misunderstanding. People assume that banks could offer better rates and greater security for their money. How do banks hold money in their deposits? Banks typically lend out or invest the money they hold at higher rates than what they give customers on their accounts. When you put your money in an interest-bearing checking account via an insurance company, you could earn interest and may be able to pull the money at any time. It could allow you time to grieve and process while having money accessible. How can that possibly be a bad idea? When considering a life insurance death benefit, a policy that allows you the flexibility of payment options may be highly desirable.
For more information about life insurance death benefits, please read “Are Life Insurance Death Benefits Taxable?”
