What is a Death Benefit?
A death benefit is a cash payout that the beneficiary of a life insurance policy receives. Life insurance policies in New Zealand are not subject to income tax, and named beneficiaries ordinarily receive the death benefit as a lump-sum payment via the bank.
There are a few things you should know about beneficiaries if you’re buying life insurance or filing a claim on an existing policy:
- The beneficiary of a life insurance policy must be named specifically.
- There can be more than one beneficiary — and this happens frequently in reality.
- A beneficiary does not have to be a person; it can be an organisation, a charity, or a family trust.
An heir is not always the same as a life insurance beneficiary
Although an heir is anticipated, a beneficiary is named.
If a person dies intestate (i.e., without a will), their heirs are the persons who may be legally entitled to inherit the deceased’s estate — their spouse, children, and so on.
However, the policyholder can instruct the insurer to pay the death benefit to one or multiple named beneficiaries. Someone that’s not an heir.
Understanding death benefits
It can feel morbid to plan for a time when you won’t be here with your family. However, you can rest assured that your family will be financially supported if you have the proper insurance cover and a personal last will to specify how you would like your assets distributed after you pass away.