How Life Insurance Works Following the Death of the Insured

If you or another income-earning family member died today, what would your family’s financial situation be like? It’s not a pleasant subject to consider, but the knowledge that there are funds to help cover your family’s daily needs and costs provide a small comfort. One way to ensure your family’s survivors have immediate cash after a death is thorough and proper planning, as well as life insurance, says Edward E. Graves, author of McGill’s Life Insurance.

A life insurance policy’s death benefits provide survivors with cash within a few days of a claim’s filing and frequently makes up a large portion of any family’s “emergency funds.”

Consider all the daily living needs that cash from life insurance proceeds could be used for. While every family’s living situation is different, food, utilities, transportation, other insurance bills and mortgage or rent payments are common essentials. With children, school or college tuition expenses are also a factor.

The Bureau of Labor Statistics provides numbers and guidelines for people who want to create an emergency fund. The figures do account for inflation and increasing prices.

During the transition period after a death, some non-essential costs may help your family maintain their familiar standard of living. These include cable bills, newspaper or magazine subscriptions, entertainment costs and air conditioning or heating bills.

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Also, before purchasing a life insurance policy, you might want to think about inflation. While inflation may not affect a term life policy to the same extent (term life policies are often short-term) as a whole life policy, inflation can eat into the amount of death benefit your family receives.  Because whole life policies are generally purchased for 20-plus years, which is a long stretch of time before beneficiaries will cash in the policy, inflation is more of a concern.  Insurance experts suggest when deciding upon the amount of death benefit to purchase, you should account for inflation of 3 to 5 percent annually for daily living expenses and an additional 8 to 10 percent annually for healthcare and education costs.

The good news is most individual and some group life insurance policies provide inflation protection. Protection against inflation can include an automatic five percent contribution increase or a cost of living adjustment after the policy has been in force for five years. In the group life insurance market, this can include a “buy-up” feature that allows employees who re-enroll to gradually increase the amount of insurance coverage each year (depending on the amount of coverage) without having to submit to a paramedical examination.

In either case, it is best to discuss your immediate and future needs with an insurance agent.

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