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What is a life insurance death benefit?

The death benefit is the most important part of the life insurance policy; it’s literally what you’re paying for when you sign up for life insurance coverage.

Life insurance protects your loved ones from the financial risk of being without your income when you die.

The way it works is that the life insurance company pays your beneficiaries —the survivors you selected in your policy agreement — a sum of money called a death benefit. The death benefit is the most important part of the life insurance policy; it’s literally what you’re paying for when you sign up for life insurance coverage.

When you sign up for life insurance coverage, what you’re really signing up for is the death benefit. If you buy a $500,000 life insurance policy, that means, with some rare qualifiers, the carrier will pay a $500,000 death benefit to your beneficiaries if you die while the policy is active. The amount of coverage you need is the largest factor in determining your premiums, so make sure you’re not buying more than you can afford.

The death benefit is meant to help your beneficiaries continue to pay their bills and finance their lifestyle when you’re no longer around to contribute an income. But it can be used for just about anything: college education, a globetrotting vacation, buying stocks, even paying taxes.

Read on to learn more about:

How much is a death benefit?

The death benefit is equivalent to the amount of coverage you purchased. It can range from just a few thousand dollars to millions of dollars, but the exact amount you should purchase is contingent on your personal needs.

When purchasing life insurance coverage, take stock of all the financial expenses you help cover. That could mean payments on a mortgage or auto loan, for example, which keep the house or car from being repossessed if your loved ones can’t continue paying the bills. In fact, any loan debt that your surviving spouse (or anyone else) had cosigned will become his or her sole obligation when you die.

You also may want to provide a good life for your dependents, so your life insurance coverage should include the cost of their college tuition and a financial cushion for when they graduate. If your dependents are young, you should calculate how much it’ll cost to raise them.

You should also factor in end-of-life expenses, including the cost of a funeral or medical care.

The death benefit needs to be large enough to cover all these situations. It’s common for someone with two dependents and a spouse to need well over a million dollars in coverage. You’ll pay higher premiums for more coverage, but that’s the trade-off you make for keeping your family financially secure when you shuffle off the mortal coil.

When is the death benefit paid?

Although the death benefit is paid to the insured’s beneficiaries when you die, it doesn’t always happen automatically. That’s because the life insurance company doesn’t always know when its customer has died, and it could be years before they find out unless your beneficieries alert them first.

How do I claim the death benefit?

If you’re the beneficiary of the policy, you’ll need to file a claim, which means finding the policy, visiting the life insurance carrier’s website (or calling them), and filling out a claims form. You’ll be asked for supplementary documentation as well, including a death certificate.

Once the life insurance company confirms that the policyholder has died, and that the death happened in a way that conforms to the rules of his or her policy, your claim will be approved and you’ll get paid.

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When is the death benefit paid?

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

Delays may be caused by a suspicious death that occurs during the contestability period, which lasts for two years after the policy is put into force. During the contestability period, the life insurance carrier reserves the right to contest any death benefit claim.

If you can’t find the life insurance policy, scour the deceased’s home and records for it, including any digital storage, since you may need it to file a claim. You can also check the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service, which searches a database of known policies but could add up to an additional 90 days to your search.

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 claim form.

Others may choose to convert the death benefit into an annuity, depositing the death benefit into an investment account from which yearly payments are made until the money runs out.

Can the death benefit amount ever decrease?

The policyholder is expected to tell the complete truth about his or her medical history and lifestyle when signing up for the policy. That helps the carrier make an accurate assessment of the risk the insured poses that he or she will die while the policy is in force and the life insurance company will have to pay out. You need to be completely honest about illnesses you have or have had as well as any of your risky hobbies like smoking or offering dental services to sharks.

The life insurance company will use that information along with your coverage needs to determine how much you pay in premiums. But if you lie about or misrepresent any of this information in order get a lower premium, the life insurance company may find out when you die.

When this happens, the company may just cancel your policy altogether, denying your beneficiaries the death benefit you’d been paying for while alive. The carrier may also reduce the death benefit by the amount in premiums you would’ve been paying had you represented yourself truthfully.

Naming a beneficiary

The beneficiary is the person(s) or entities you choose to receive the death benefit after you’re pushing up daisies. 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.

Many people choose their spouse as a beneficiary. However, if you get divorced, it won’t be reflected on the life insurance policy unless you ask the carrier to change it, and your ex-spouse could still wind up collecting the death benefit.

You can’t name a child as the direct beneficiary of the death benefit, although you can direct the death benefit to go into a trust that the child can access for necessary expenses.

In some cases, the beneficiary may not be alive to receive the death benefit, which is why you should update your beneficiaries whenever relevant. If no one can claim the death benefit, it may go toward your estate, in which case it’ll be used to pay off any of your lingering debts.

Accelerated death benefits

Accelerated death benefits are paid to policyholders who are still alive, but who have a terminal illness or are otherwise expected to pass away soon. Accelerated death benefits can go toward paying hospice and end-of-life care, or even an expensive vacation if you’re feeling up to it.

The accelerated death benefit could relieve your loved ones of having to foot the bill out of pocket. However, the total death benefit will be reduced by the amount of the accelerated death benefit, meaning there will be less to disburse to your beneficiaries when you die..

Accelerated death benefits are enacted by an add-on to the policy called a rider. Some riders are included in the policy at no additional cost, but your policy’s accelerated death benefit rider may cost extra.

Is the death benefit taxable?

The death benefit is generally not taxable if you paid your premiums using after-tax dollars. However, it may be taxable if some part of it was paid by your employer (if you have an employer-sponsored plan, or group life insurance) or if you paid your premiums with pre-tax dollars.

If you put your death benefit in a trust, such as when the beneficiary is a child, payments to the child for the child’s expenses may be taxed as the child’s income.

Additionally, if you opt 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 taxed. Check with your financial planner to confirm.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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