More than half of Americans have life insurance. And the primary advantage of having life insurance is that you can provide a death benefit to anyone you name as a beneficiary.
What Is a Life Insurance Death Benefit?
A death benefit is the amount your life insurance policy will pay to your beneficiaries if you pass away, as long as your policy is in force.
Who Gets the Death Benefit?
Life insurance beneficiaries are the people or organizations you’ve chosen to receive the death benefit from your life insurance policy.
A beneficiary could be:
- People, such as a spouse or your adult children
- A trust
- A business
You can choose multiple beneficiaries for your life insurance policy and you can select how much of the death benefit goes to each. For instance, a business, an individual and a charity could all be named as beneficiaries on the same policy.
You can designate the percent of death benefit to each beneficiary, such as 80% to a spouse and 20% to a brother.
A policyholder can remove or add beneficiaries at any time.
How beneficiaries can use a death benefit
Beneficiaries can use money from death benefits however they choose. Beneficiaries often use this money for everyday bills like groceries and utilities, for larger debts like a mortgage or to put a child through college.
How Do Life Insurance Death Benefits Work?
A death benefit is typically paid in a lump sum to beneficiaries, but there are other options.
Death benefit payout options
There are several ways to receive a life insurance payout. Here are the usual death benefit payout options.
- Lump-sum payout: This type of death benefit is paid out all at once, rather than over a period of time. It is generally not counted as taxable income.
- Retained asset account: Beneficiaries might have the option to leave the death benefit with the insurance company in an interest-bearing account. You typically get a checkbook to access the cash in the account. Any interest earned will be taxable.
- Life income payout: You may be able to receive the death benefit in guaranteed payments for the rest of your life. The amount you receive in each payment will be based on your age when you file the life insurance claim.
- Life income with period certain: This option allows you to receive payments for a certain period, and for your beneficiaries to receive the remaining payments if you die before the period is up.
- Specific income payout: This type of death benefit is paid out in installments over time, such as 10% annually for 10 years. The portion of the benefit that has not been paid out generally earns interest for the beneficiary. Any interest earned over this period will be taxable.
Death benefits with different types of life insurance
Here is how the death benefit works with term life vs. permanent life insurance.
- Term life insurance: Term life insurance policies lock in level premiums for a set period, such as 10, 20 or 30 years. If you pass away while your term life policy is in force, your beneficiaries receive the payout. No death benefit will be paid if your policy expires and you’re still living.
- Permanent life insurance: Permanent life insurance is designed to stay in force for your entire life. If you pass away at any time, your beneficiaries will receive a death benefit—as long as your policy has not lapsed due to lack of payment.
There are certain circumstances in which a death benefit may be lower than the policy’s face value. For example, if you have life insurance with a cash value account and take out a loan without paying it back, this amount will be subtracted from the death benefit if you pass away.
Cash value accounts are savings or investment accounts that come with certain types of whole life insurance and accumulate value. Typically, if you don’t use the money in your cash value account before you pass away, the cash value reverts back to the life insurance company if you pass away.
How Much Is My Death Benefit?
The death benefit amount is based on the face value of the life insurance policy, with subtractions for any withdrawals you made from cash value or policy loans you didn’t pay back.
For example, you bought a $500,000 term life insurance policy, the payout to your beneficiaries will be $500,000. (Term life insurance does not have any cash value for policy loans or withdrawals.)
When deciding how much money you should provide to your beneficiaries, consider your reasons for buying life insurance. If you want to provide funds to replace your income for 10 years, you could choose a death benefit that closely matches your income multiplied by 10.
How Do Death Benefits Affect My Premium?
The size of your death benefit is one factor that affects how much you’ll pay in life insurance premiums. Other factors include the type of life insurance, your age, gender, health and whether you use nicotine.
The following examples show examples of premium payments for certain death benefit amounts.
Average annual costs for a variety of term life insurance amounts
|Term life insurance death benefit amount||Monthly premium for a 30-year-old male||Monthly premium for a 30-year-old female|
|Term life insurance quotes are for healthy non-smokers of average height and weight. We averaged the four cheapest quotes we found online. Your own quotes will be different depending on your age, health and other factors.|
Note that these examples are meant to be used for comparison. The most accurate way to see how much you’d pay for a certain policy is to compare life insurance quotes.
Types of Death Benefits
There are a few types of death benefits to consider when buying life insurance.
Fixed death benefit
This common type of death benefit is a set, unchangeable amount. For example, whole life insurance policies have fixed death benefits.
Some term life insurance policies have fixed death benefits, too, but other term life policies allow you to adjust a death benefit, such as lowering the amount.
Adjustable death benefit
Some universal life insurance policies allow you to adjust the death benefits amount (within certain parameters). You can choose a higher or lower death benefit over the course of the policy’s life. Doing so will change your premium payments.
Graded death benefit
With a graded death benefit, your beneficiaries won’t get paid the full death benefit if you die from a health condition within the first few years after buying the policy. Life insurance policies that don’t require a medical exam or ask a lot of health questions, such as guaranteed issue life insurance, commonly have graded death benefits.
How to File a Claim and Receive a Life Insurance Death Benefit
- Call the life insurance company. The key to making a claim is to know which life insurance company holds the policy for the deceased person. You don’t need the policy number to make a claim. When you report the death to the life insurance company, the insurer can verify that you are a beneficiary on the policy.
- File a claim and send a certified death certificate. Expect to be required to send a certified copy of the death certificate along with claim paperwork. You can typically get a copy of this document from the funeral home or medical professional who confirmed the death of the individual, or from a vital records office.
- Fill out the insurance company’s required paperwork. The life insurance company can send you a claims form or direct you to it online.
- Wait for the claim to be processed and paid out. There is typically no time limit for submitting a life insurance claim, but the sooner you file the claim, the sooner you will receive the death benefit.
Could a Life Insurance Claim be Denied?
There are situations where a life insurance claim could be denied, such as:
- You aren’t a beneficiary. In some cases a life insurance policyholder will change beneficiaries without informing the previous beneficiaries.
- The life insurance policy had lapsed due to lack of payment. If someone forgets or neglects to pay the premium, there’s typically a grace period. After that, the policy will lapse. If the insured person passes away while coverage is not in force, there is no death benefit payment. If the policy lapse was very recent—for example, because the policyholder was in the hospital and didn’t pay their bills—it may be possible for the beneficiary to pay the premiums due and then receive the death benefit.
- Fraud was involved. If an applicant purposely hides a medical condition or other relevant information from their life insurance company, their beneficiaries might not receive the death benefit. Most life insurance policies have a two-year contestability period during which a claim might not be paid on a death if there was fraud or misrepresentation on the life insurance application.
- The insured died from suicide. Life insurance policies generally do not pay out death benefits if a person passes away from suicide within the first two years after purchasing a life insurance policy.