What Is a Death Benefit?

The death benefit is a component of a life insurance policy. It is paid as a lump sum to the beneficiary, usually by cheque, upon the death of the insured. In Hong Kong, the death benefit is tax-free (like all insurance benefits in Hong Kong).

How is the death benefit calculated?

The death benefit is calculated as follows:

Death Benefit = (Sum Insured + Guaranteed Cash Value + Non-guaranteed Dividends and Bonuses) - Loans

The sum insured (also known as the sum assured or face amount) is specified on the first page of a life insurance policy. It is the amount the policy promises to pay upon the death of the insured.

If you have a term life insurance policy (as opposed to a whole life policy), then the death benefit will not include cash values, dividends, bonuses or loans as factors.

What is the death benefit used for?

The death benefit can be used for a variety of purposes, depending on what the beneficiary chooses to do. Often it is used to pay for funeral or memorial services, cremations, burials, or other after-death arrangements. Such expenses can run from HK$ 10,000 to over HK$ 1,000,000, according to the style, size and scale of the ritual.

If the deceased was the sole provider for their family, then their beneficiaries may choose to use the death benefit to pay for their ongoing living expenses, such as rent, mortgage, food, clothing, education and healthcare.

Who can claim the death benefit?

The death benefit may only be claimed by a named beneficiary. This beneficiary must present certain documents to verify their identity and relationship with the deceased.

How can one claim the death benefit?

To claim the death benefit, the beneficiary must fill out the completed death benefit claim form and submit it to the insurance company. They will also be required to present the following documents:

• Original death certificate of the insured
• Original life insurance policy document of the insured
• Completed death benefit claim form
• Identification documents
• Proof of relationship with the deceased (such as a marriage or birth certificate)

What is a beneficiary?

For each life insurance policy, the policyholder must designate a person who receives the death benefit upon the death of the insured. This person is the beneficiary.

Usually, the beneficiaries will be the policyholder’s spouse, children, or parents. A trust, charity, or organization can also be named as beneficiaries.

If the beneficiary is still a minor, then it’s a good idea to arrange for a trustee or guardian to manage the funds they receive from insurance payouts until the child is old enough to receive and manage them directly.

What are the different classes of beneficiaries?

Generally speaking, each life insurance policy allows you to designate three classes of beneficiaries.

• Primary beneficiary: Receives the death benefit if the insured person passes away.
• Secondary beneficiary: Receives the death benefit if the insured person dies and the primary beneficiary/ies have passed away.
• Tertiary beneficiary: Receives the death benefit the insured person dies and the primary and secondary beneficiary/ies have passed away.

How is the death benefit distributed among multiple beneficiaries?

When setting up the policy, the policyholder can designate how the death benefit will be distributed among the beneficiary classes. Usually, insurers will only allow you to designate shares among the primary and secondary beneficiary classes but not the tertiary class.

You are free to allocate the death benefit as you please, so long as the total for each class adds up to 100% of the benefit. Here are some examples of distributing the death benefit and what it means for the beneficiaries:

Example 1:

• Primary beneficiaries: Spouse (50%) + Child #1 (25%) + Child #2 (25%)

In other words: Upon death of the insured, their spouse receives half of the death benefit, and each child receives one quarter.

Example 2:

• Primary beneficiary: Spouse (100%)
• Secondary beneficiaries: Child #1 (75%) + Child #2 (25%)

In other words: If the spouse passes away before the death of the insured, then upon the death of the insured, Child #1 will receive 75% of the death benefit, and Child #2 will receive 25%. If the spouse is still living when the death of the insured takes place, then the spouse receives all of the death benefit, and each child receives nothing.

Example 3:

• Primary beneficiary: Spouse (100%)
• Secondary beneficiary: Child #1 (100%)
• Tertiary beneficiary: Child #2 (100%)

In other words: If the spouse and first child both pass away before the death of the insured, then upon the death of the insured, the second child will receive the entirety of the death benefit.

How do I change the beneficiaries?

You are allowed to change the beneficiaries in your life insurance policy at any time. To do so, you will need to fill out a form with details about the new beneficiaries. You can get this form for your insurance broker or provider.

If the beneficiary is 18 or above, you will need their signature to consent to and confirm the change. If they are below 18, then you don’t need to get their consent to designate them as your beneficiary.