Life insurance protects your loved ones from any financial loss that will occur when you die. If you’re covered, the life insurance company will pay your beneficiarya sum of money called the death benefit.
The money can be paid out as a tax-free lump sum or annuity and can range from a few thousand dollars to millions of dollars.
Most likely, this death benefit payout is why you’re buying a life insurance policy in the first place — to ensure that your loved ones will have the money they need if you die unexpectedly.
The right death benefit amount for you depends on your income and financial needs.
There’s generally no tax applied to the death benefit payout.
Minor children can’t be direct recipients of the death benefit.
Who gets the death benefit
The life insurance death benefit is paid out to your policy’s beneficiaries. The policyholdernames the beneficiary. You can name more than one beneficiary on your policy and can even determine the exact percentage of the death benefit that each beneficiary will receive.
Anyone else who isn’t listed as the beneficiary on your policy can’t receive the death benefit — even if it’s your spouse or a lender you owe a debt to.
It's best to periodically update your beneficiaries, and your overall policy, especially around every big life event — for example, if you’re getting married, buying a house, or having a child.
You should avoid naming minor children as your policy’s beneficiary because they can’t legally receive the money until they reach the age of majority in your state. Instead, you can direct the life insurance proceeds to a trust and dictate how the funds are used and when.
→ Learn more about life insurance beneficiaries
How much is paid out with a death benefit
The death benefit amount paid out is the coverage amount you choose when you buy your policy. If you buy a $1 million life insurance policy, your beneficiaries will receive a $1 million lump sum.
We recommend a death benefit amount of 10 to 15 times your annual income. More specifically, you'll want to add up all of your current and future expenses and make sure they are covered in your insurance policy.
Your insurance policy can cover future expenses, like your funeral, any needed childcare, or college tuition for your children. But it should also help with current expenses like your mortgage or other bills.
→ Calculate how much life insurance coverage you need
When and how the death benefit is paid out
The death benefit is paid to your beneficiaries after you die, but it doesn't happen automatically. The life insurance company isn't immediately informed when a policyholder dies, so the beneficiary must alert them by filing a death claim.
Most people choose to receive the death benefit as a lump-sum payment. This is usually paid 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 into an investment account from which yearly payments are made until the money runs out. Annuities can be subject to taxes.
A lump-sum payout works best for most budgets, but a certified financial planner can help you make the right decision for your circumstances.
→ Learn more about life insurance annuities
Steps to get the death benefit:
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.
Fill out a death claim form. This is also known as a “request for benefits.”
Provide a death certificate. The certificate will verify the date of death and support the death claim.
Wait for the provider to approve the claim. Once approved, your beneficiaries will be paid the death benefit.
Once your beneficiaries file a claim, they could get the death benefit in as little as one to two weeks, but it could take as long as 60 days. If there’s any indication of intentional fraud, the life insurance company may also investigate further before paying out the death benefit.
→ Learn more about how quickly life insurance companies pay out death claims
How the death benefit amount can decrease
For the most part, your life insurance policy’s beneficiaries will receive the total death benefit amount.
But if the insurance company discovers that you intentionally lied or disclosed false information, it may reduce the death benefit by the amount in premiums that you would have paid had you represented yourself truthfully.
It may even cancel your policy altogether and deny your beneficiaries the death benefit.
If you bought adjustable life insurance or cash value life insurance, the death benefit paid out may be different than the coverage amount you originally bought.
The death benefit is one of the most important parts of a life insurance policy — it’s the financial support your beneficiaries receive when you’re gone.
Working with a licensed advisor and laying out a strategy to get the right amount of death benefit is the best way to make sure you're protecting your family financially.
→ Learn more about how to spend the life insurance death benefit
Frequently asked questions
What is a death benefit?
The death benefit is the lump sum of money paid out to an insurance policy’s beneficiaries after the insured person dies.
How do you get the death benefit from life insurance?
After the insured dies, the beneficiary named on the insurance policy still needs to file a claim in order to receive the death benefit. In most cases, this just verifying that the insured person has died with a death certificate or similar documentation.
Do you pay taxes on the life insurance death benefit?
Generally, a traditional life insurance policy’s death benefit is paid out un-taxed. Benefits paid in installments or paid to an estate might be taxed.
What happens when you receive a life insurance payout?
When you receive a life insurance payout, it’s given as one tax-free lump sum. There are rarely guidelines about how to spend the money that you are required to follow.
It may be in your interest to consult with a certified financial planner to map out how to strategically spend the fund you receive.