By Lee Sherman
Since life insurance benefits go directly to the beneficiary named in the policy and never become part of the deceased’s estate, when claiming them you’ll be spared having to go through probate and receiving your benefits should be relatively straightforward.
The process is as simple as collecting the right documents and, if you don’t hear from them first (which is likely), contacting the insurance company to file a claim. Which documents you need may vary, depending on the kind of life insurance and your relationship to the deceased.
The moment after a loved one dies can be devastating to your psyche and it’s not the time when you’ll want to have to deal with insurance companies or cobbling together the paperwork. Knowing what you need and what to do ahead of time can’t do anything to lessen your grief but it can help you to be better prepared when the time comes.
Here’s what you need to do to collect your inheritance:
If you are the spouse of the deceased, it is likely that you have access to both the original death certificate and the original life insurance policy. If it has been placed somewhere safe, like a bank safe deposit box, you’ll need to make sure you have whatever account information you need or a key, preferably ahead-of-time. In any event, you should receive a claim form from the deceased’s insurance or, if you are a more distant relative or friend, once you are notified of their death, you can ask for this form yourself. The money will come directly to you (the beneficiary), unlike other claims on the deceased’s estate, it is handled completely outside of probate, avoiding that hassle. In addition to the death certificate, which lists the date, location and cause of a person’s death, you may need their social security number or a copy of the beneficiary’s government-issued ID, such as a driver’s license or passport.
In most cases, beneficiaries are either already aware and/or automatically notified of the passing of a person who has listed them as their beneficiary but there may be times when this can come as a surprise. Believe it or not, lost or unclaimed benefits in the US can number in the billions of dollars. If you feel you are entitled to benefits you’ll have to either file a claim yourself or have an estate lawyer, trustee, or other family member do it for you. The difficulty of obtaining some of the required documents may mean you’ll need or want someone else’s help.
Generally speaking, the money you receive as a life insurance beneficiary due to the death of the insured person, isn’t considered by the IRS as taxable income and there’s no need to report it. However, the interest you receive is taxable and you must report this as income on your 1099 form.
There’s one last thing to be aware of. In some circumstances an insurer may refuse to pay out benefits entirely. For example, if the cause of death was suicide or as a result of certain pre-existing health conditions (such as high-blood pressure or cancer). In general though, these exceptions need to be spelled out in the policy ahead of time.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.