Q

What is a life insurance death benefit?

A

The death benefit is the tax-free payout your beneficiaries receive if you die; it's essentially what you're paying for when you sign up for life insurance coverage.

Nupur GambhirRebecca Shoenthal author photo

By

Nupur Gambhir

Nupur Gambhir

Life Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius and licensed Life, Health, and Disability agent in New York.

&

Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

Updated March 18, 2021|7 min read

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Life insurance protects your loved ones from the risk of losing the financial support you provided when you die. If you’re covered, the life insurance company pays your beneficiaries (the survivors you selected in your policy agreement) a sum of money called a life insurance death benefit.

Most likely, this death benefit payout is why you’re buying your life insurance policy in the first place — to ensure that your loved ones don’t financially suffer if you die unexpectedly.

If you buy a $500,000 life insurance policy, that means the life insurance company will pay the entire $500,000 life insurance death benefit to your beneficiaries if you die while the policy is active (with some rare exceptions). The amount of coverage you need is the largest factor in determining your premium payments, so make sure to get the right amount to protect the financial security of your family, but not more than you can afford.

Key Takeaways

  • The life insurance death benefit replaces the financial support you offered to your loved ones if you die

  • The death benefit amount depends on your income and financial situation

  • There is generally no tax applied to the death benefit

  • Minor children cannot be direct recipients of the death benefit

What is the life insurance death benefit?

By definition, the life insurance death benefit payment is the face value, or the amount of coverage you purchase, when you sign up for your life insurance policy. If you die while your policy is in force, it is paid out to your beneficiaries as a tax-free lump sum or annuity. The death benefit can range from a few thousand dollars to millions of dollars and the exact amount you should purchase is contingent on your dependents’ needs and your financial circumstances.

Who receives the death benefit from a life insurance policy?

The life insurance death benefit is paid out to your policy’s designated beneficiaries. You can name more than one beneficiary on your policy and can even determine the exact percentage of the death benefit that each beneficiary receives.

Anyone who isn’t listed as the beneficiary on your policy cannot receive the death benefit — whether it be your spouse or a lender you owe a debt to.

Learn more about life insurance beneficiaries

How much does a death benefit pay out?

The death benefit amount paid out to your beneficiaries will be the coverage amount you choose when you buy your life insurance policy. If you buy a $1 million life insurance policy, your beneficiaries will receive a $1 million lump sum.

When you’re purchasing life insurance coverage, take into account all the financial expenses you cover to determine how much the death benefit should be. That could include payments on an auto or mortgage loan. The death benefit would keep the car or house from being repossessed if your loved ones can't continue paying the bills on their own.

In fact, any loan debt that your surviving spouse (or anyone else) has co-signed will become his or her sole obligation when you die.

The death benefit should be large enough to cover a variety of situations, including end-of-life expenses like the cost of your funeral or cremation, everyday expenses, or the cost of your children’s college tuition

Find out how much life insurance coverage you need

When do you receive the death benefit payment?

The death benefit is paid to your beneficiaries after you die, but it doesn't happen automatically. The life insurance company usually doesn’t know when the policyholder has died, so the beneficiary must alert them by filing a death claim.

Steps to receive the death benefit payment:

  1. Find the insured’s policy document. If you can't find the life insurance policy in their home or digital records, also check the National Association of Insurance Commissioners' Life Insurance Policy Locator Service or the National Association of Unclaimed Property, which searches a database of known policies.

  2. Fill out a death claim form, also known as a “request for benefits.”

  3. Provide a death certificate to the deceased’s insurance agent that verifies the date of death and supports the death claim.

  4. Once the provider confirms the policyholder’s death and approves the claim, you will be paid the death benefit.

Learn more about how to file a life insurance claim if you're a beneficiary

How long does it take to receive life insurance death benefits?

Once you file a claim, you may receive the death benefit in as little as one to two weeks, but it could take as long as 60 days if the life insurance company needs more time to review the claim.

Contestability

The payout can be delayed if the death occurred during the contestability period, which lasts for two years after the policy is put in force. During this time, the life insurance company reserves the right to dispute or investigate any death benefit claim. After the two-year contestability period, if there is any indication of intentional fraud, the life insurance company can also investigate further before paying out the death benefit.

How is the death benefit paid?

Most people choose a lump-sum payment, usually in the form of a check or a direct deposit into their bank account, which is listed on the death claim form.

Others may choose to convert the death benefit into an annuity, depositing the death benefit payments into an investment account from which yearly annuity payments are made to the beneficiary until the money runs out. Annuities, unlike lump sums, can be subject to tax implications. A lump-sum payout works best for most budgets, but a certified financial adviser can help you make the right decision for your circumstances.

Learn more about life insurance annuity

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Can the death benefit amount ever decrease?

For the most part, your life insurance policy’s beneficiaries will receive the total death benefit amount. But if you intentionally lied about or misrepresented any personal or medical information during the application process (committed fraud) to obtain a lower premium rate, the life insurance company may find out when you die and decrease the death benefit accordingly.

You should tell the complete truth about your medical history and lifestyle — including any illnesses and risky hobbies — when signing up for an insurance policy. The life insurance company will use that information, along with your coverage needs, to determine the cost of your premium payments.

If the insurance company discovers that you intentionally disclosed false information, they may reduce the death benefit by the amount in premiums that you would have paid had you represented yourself truthfully. They may even cancel your policy altogether and deny your beneficiaries the death benefit that you had been paying for throughout your life.

There are a few other circumstances when the life insurance death benefit may be different than the coverage amount you designated:

Adjustable life insurance

True to its name, with an adjustable life insurance plan you can adjust the death benefit amount as your needs change.

Cash-value life insurance

Unlike term life insurance, cash value life insurance comes with an investment-like component that gains value over the years. This will increase the death benefit if you don’t access the cash value while you're still alive.

Naming a life insurance beneficiary

The beneficiary is the person (or people) you choose to receive the death benefit payment after you've passed away. You choose your beneficiary at the time you take out the policy, but you should also periodically update your beneficiaries if your circumstances change throughout life.

Your beneficiary doesn’t have to be a person; you can also name an organization, business, or charity.

Many people choose their spouse as a beneficiary. In some states, you’re required to by community property laws, unless you ask for the spouse’s consent otherwise. Also, keep in mind that if you get divorced, it will not be reflected on the life insurance policy until you change your beneficiary within your policy.

We recommend naming secondary (contingent) beneficiaries too, in case something happens to your primary beneficiary. However, you should avoid naming children as the direct beneficiary of the death benefit because they won’t be able to legally receive the money until they reach the age of majority in your state. Instead, you can direct the life insurance proceeds to go into a trust that your child can access for necessary expenses.

If no one can claim the death benefit, it will likely pay into your estate, where it will be subject to taxes and used to pay off any of your outstanding debts.

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What is an accelerated death benefit?

An accelerated death benefit is paid to policyholders who are still alive but have a terminal illness and are expected to pass away soon. Your life insurance company will require proof of life expectancy to qualify. This can be anywhere from under six months to two years, depending on the life insurance provider.

Once you meet the qualifications, you can access a portion of the benefits under the accelerated death benefit rider. Riders are policy add-ons that usually cost extra, but the accelerated death benefit rider is often included at no additional cost, depending on your carrier.

The accelerated death benefit can be used to relieve your loved ones from having to foot the bill out of pocket. However, if you access a portion of the death benefit early, you will reduce the total death benefit, meaning there will be less to disburse to your beneficiaries when you die.

Are death benefits taxable?

The death benefit is generally not taxable if you paid your premiums using after-tax dollars.

However, it may be taxable in certain circumstances:

  • If you paid for an employer-sponsored plan or group life insurance with pre-tax dollars

  • If you put your death benefit in a trust, such as when the beneficiaries of the death benefit are children. Payments to the child for his or her expenses may be taxed as the child's income.

  • If you opted for a permanent life insurance policy with a cash value component, such as whole life insurance. Any gains you make from the cash value may be taxable if you withdraw them as cash. Check with your financial planner to confirm.

What happens when you inherit life insurance?

Your beneficiaries can use the death benefit to pay their bills and finance their lifestyle when you are no longer around to contribute an income. There are no restrictions on how they spend the death benefit, which can cover anything from taking a vacation, to buying stocks, and even paying taxes.

Because your loved ones’ financial health is at stake, it’s important to speak to a licensed agent about allocating the right sum for the life insurance death benefit. If you’re able to work with a financial adviser and lay out a strategy for them as to how to spend the death benefit, all the better.

Learn more about how to spend the life insurance death benefit

FAQ

What is a death benefit in life insurance?

The death benefit is the lump sum paid out by life insurance companies if the policyholder has passed away. It can range from a few thousand dollars to millions of dollars and replaces the policyholder’s income.

How do you get the death benefit from life insurance?

To get the life insurance death benefit, the policy’s beneficiaries need to file a death claim form with the life insurance company and provide proof that the policyholder has died. Each life insurance company has different paperwork that can be accessed through the insurer.

Do you pay taxes on the life insurance death benefit?

Generally, a traditional life insurance policy’s death benefit is paid out un-taxed. But if you list your estate or a trust as your beneficiary or get a taxable policy, such as an employer-sponsored plan or cash value life insurance, the death benefit can be taxed.

What happens when you inherit life insurance?

If you inherit a life insurance death benefit, you should consult with a certified financial planner to map out how to strategically spend the lump sum. They can help you determine how much to allocate towards your current expenses, retirement, and investments and ensure that the death benefit is utilized according to your needs.

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