Do Pension Plans Allow Any Death Benefits?

Pension plans play a vital role when it comes to securing your future financially. These offer a regular source of income to help you with the cost of living in your future years. 

But what is the possibility that you are going to use the retirement funds? 

Life is uncertain, so investment planning should be done considering the same. Before investing in a pension plan, it is important to understand whether pension plans allow any death benefits so one can give their family a secure future even in their absence. 

In this blog, we will discuss what death benefits are and how they work in a pension plan. 

Let’s begin! 

What Are Death Benefits?

Death benefits are the sum assured amount provided to the nominee in case of the policyholder’s unfortunate death. The amount will help the nominee to handle the challenging immediate and future expenses. 

In most situations, the nominee receives the death benefit within 30 days of filing the claim. Now, the way this benefit is given to the beneficiary depends on the option chosen by the policyholder, either they can opt for a lump sum amount or regular payouts till the policy ends. 

How do Death Benefits in a Pension Plan Work?

The working of death benefits varies according to the chosen pension plan. Below, we have explained the working of death benefits in different types of pension plans.

• Deferred Annuity

In deferred annuity plans, the insured pays premiums for a certain number of years, depending on the chosen plan. Then, the insurance company will pay the policyholder a regular retirement income, or a lump sum, at some chosen future date. 

Death benefit of a deferred annuity: If death happens during the pay-out stage, the monthly payments get discontinued. In addition, death benefits get passed on to your nominee during the policy term. 

• Immediate Annuity

In immediate annuity plans, the policyholder starts receiving the payments just after depositing the lump sum amount as early as the following month. Policyholders can choose to receive their annuity payouts monthly, quarterly, half-yearly, or annually, as per their requirements. 

Death benefit of an immediate annuity: The monthly payments get stopped, and the nominee receives the balance payout. 

• Guaranteed Period Annuity

Guaranteed Period Annuity offers consistent payments and annuity benefits to policyholders during their retirement years, irrespective of market fluctuations. 

Death benefit of a guaranteed period annuity-  If the annuity holder dies during the guaranteed period, the annuity gets transferred to the beneficiary. 

• Life Annuity

These schemes pay an annuity to the retiree for their lifetime. It comes in two phases: the accumulation phase, where the buyer funds their annuity with premiums or a lump-sum payment, and the Annuitization phase, where the insurance company makes regular payouts to the annuitant. Generally, these come with two options, “With a spouse” and “Without a spouse.”

Death benefit of Life Annuity plan - If the annuitant dies and there is no beneficiary, annuity payment will immediately stop. On the other hand, if “With a spouse” is chosen, the spouse of the insured will receive monthly payments after the policyholder’s death. 

• Unit-Linked Insurance Plans (ULIPs)

ULIP plans cater to the investment and pension requirements of an investor. One part of the premium gets invested in the bonds, stocks, and other financial instruments and the other part goes to the life insurance to offer financial protection. 

Death Benefit of Unit-Linked Insurance Plans: In case of premature death of the investor, the nominee will obtain the assured death benefit.  Some ULIP plans pay a higher sum assured value, while others pay the assured sum value plus the fund value to the nominee. 

• National Pension Scheme (NPS)

The Government of India introduced this National pension scheme as a retirement plan for the golden years of life. The amount gets invested in debt and equity markets, based on your preference. After retirement, investors can take a significant portion of the corpus and the remaining amount as a monthly pension post-retirement. 

Death benefit of National Pension Scheme- In the case of the death of the investor before the scheme gets encashed, the nominee/ legal heir can withdraw the amount collected in the account. The amount can be withdrawn entirely or in a lump sum. In addition, there will be no option left to purchase an annuity or monthly pension after the investor’s death. 

The Bottom Line

The primary purpose of the pension plan is to offer a secure retirement period, but as explained above, these provide death benefits as well so your family can handle difficult situations in your absence. 

So, if you are also planning to buy a pension plan, make sure to understand the working of provided death benefits along with specific terms and conditions. 

Frequently Asked Questions (FAQs)

Ques 1. How do I know if my pension plan includes death benefits?

Ans. It’s very simple to identify! In the policy brochure, find the “Death Benefit” or related section to find out if your pension plan includes death benefits or not. 

Ques 2. What is the death benefit of a pension plan?

Ans. In case of the policyholder's unfortunate demise, the nominee receives the lump sum amount. However, various companies have different terms and conditions when it comes to death benefits, so it’s necessary to review the policy and understand the benefits given to the nominee.  

Ques 3. Who can be designated as a beneficiary for pension plan death benefits?

Ans. You can make your spouse, children, or other dependents a designated beneficiary. 

Ques 4. What is the death benefit provided under NPS? 

Ans. The nominee/legal heir can withdraw the amount collected in the account either in a lump sum or as a whole. 

Ques 5. What happens to the death benefit in the case of an immediate annuity?

Ans. The monthly payments get stopped, and the nominee receives the balance payout.