Life insurance protects your loved ones from financial loss. If you have an active life insurance policy when you die, the insurance company will pay your beneficiary a sum of money called the death benefit.
The money can be paid out as a tax-free lump sum or annuity. The amount of money your loved ones can claim depends on the policy you purchased — death benefits can range from a few thousand to millions of dollars.
Most likely, this 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.
Who gets the death benefit?
The life insurance death benefit is paid out to your policy’s beneficiaries. You’ll name your intended beneficiary on your initial life insurance application, although you can also change your beneficiaries once your coverage is active.
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.
Many people list their immediate family members as their life insurance beneficiaries. However, 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.
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.
How much money is a death benefit worth?
The death benefit amount paid to your beneficiaries is the same as the coverage amount you choose when you buy your policy. If you buy a $1 million life insurance policy, your loved ones will receive a $1 million lump sum.
A common rule of thumb is to apply for coverage 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.
How is the death benefit paid out?
The life insurance company isn’t immediately informed when a policyholder dies, so the beneficiary must alert them by filing a death claim. Once the death claim is processed and approved, the beneficiary receives the death benefit.
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. The insurer will deposit the death benefit into an investment account, and the beneficiary will receive regular installments until the money runs out, or until the end of their life. Annuities can be subject to taxes.
A lump-sum payout works best in most circumstances, but a certified financial planner can help you make the right decision for your family.
How to claim the death benefit
Find the insured person’s policy documents. If the beneficiary can’t find the life insurance policy in their home or digital records, they can 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.
Can you lose the death benefit payout?
In most cases, your policy’s beneficiaries will receive the total death benefit amount.
But if the insurance company discovers that you intentionally lied or disclosed false information while buying the policy, it may reduce the death benefit.
The company could even cancel the 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 from the coverage amount you originally bought, depending on the terms of your policy or if you have any outstanding policy loans.
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.