End-of-life expenses, such as funerals and medical care, can financially strain loved ones as they grieve. As a result, many get life insurance policies to help loved ones cover these costs.

However, most life insurance policies offer death benefits far larger than end-of-life expenses. Beneficiaries can use these funds for almost anything, creating financial security if you pass away.

This article will explain life insurance and death benefits in more detail, then cover some other ways beneficiaries can use the death benefit payout.

What is Life Insurance?

Life insurance is a contract where an insurer promises to pay a sum of money to designated beneficiaries if you pass away during the policy term. In exchange, you pay monthly or annual premiums to maintain the coverage.

There are many types of life insurance policies. Plus, insurers may charge different amounts for similar coverage. As a result, many research life insurance quotes online to save time and compare insurers to find the best rates on coverage.

How Death Benefits Work

The death benefit offers your beneficiaries substantial financial assistance if you pass away with an active life insurance policy. 

Beneficiaries must go through a few steps to claim the death benefit:

  1. File a claim with the insurance company.
  2. Provide proof of your passing.
  3. Select payout method — many insurers pay a lump sum, but some may allow beneficiaries to receive regular installments.
  4. Receive the death benefit.

What Can a Life Insurance Payout Be Used For?

Life insurance payouts are not just for end-of-life costs. Here are some other ways your life insurance policy can protect your loved ones:

Paying Off Outstanding Debt

When you pass away, your estate may be used to pay off outstanding debts, such as mortgages and personal loans. For example, your home may be foreclosed on to pay off any outstanding mortgage amount if your loved ones cannot pay the mortgage.

Your life insurance beneficiaries can use the death benefit payout to pay off outstanding debts, helping them preserve more of your assets.

Covering Living Expenses

If you’re the primary earner in your family, or if the family depends on both partners’ incomes, a life insurance policy can be an excellent way to protect your family.

The death benefit payout can replace your income, helping your loved ones cover living expenses. Insurers may allow your beneficiaries to receive the payout in installments, which is easier for some to manage than a lump sum payout.

Funding Children’s Education

Rising college costs can cause your children to incur significant debt if you don’t have a plan — especially if you pass away before or during their college years.

Traditional death benefits can be large enough to cover most, if not all, of a college education for several children. This helps your children graduate with less debt and start their adult lives in a better financial position.

Donating to Charity

You can designate charitable organizations as beneficiaries if you are passionate about a particular cause. This allows them to receive a portion of your death benefit when you pass away.

You’ll simply need to provide the organization’s name, tax ID, and contact information. You may also need to inform the organization so they can contact your insurer to collect the death benefit when you pass away.

The Bottom Line

Life insurance death benefit payouts go far beyond end-of-life expenses. They can help your loved ones pay off outstanding debts, fund your children’s education, and create substantial financial security. You can even support a charitable cause to leave a larger legacy.

Therefore, life insurance can be key to your overall financial picture.

If you’re beginning your life insurance search, it’s critical to gather and compare multiple quotes so you can find the best rates on the coverage you need.