What Is a Life Insurance Death Benefit?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

What Is a Life Insurance Death Benefit?

A life insurance death benefit is the money an insurance company pays out to your beneficiaries if you die while your policy is active. Death benefits are not taxed as ordinary income.

Key Takeaways

  • A death benefit is the payout your beneficiaries receive from your life insurance policy after your death.
  • This amount is usually tax-free and can be distributed as a lump sum or in installments.
  • A base life insurance policy includes either an accidental or all-cause death benefit.
  • You can add options like an accidental death benefit or accelerated death benefit through riders.

What Is a Death Benefit?

A death benefit, also known as a life insurance death benefit payout, is the sum paid to a beneficiary when the insured person dies. This payment can also result from an annuity or pension.

In life insurance, the policyholder selects the death benefit amount and pays premiums accordingly. A higher death benefit means higher premiums, and premiums are also higher for older individuals.

How Death Benefits Work

Under a life insurance contract, death benefits are guaranteed to be paid to the named beneficiaries, provided the premiums are paid while the insured is alive.

Here’s how a death benefit in life insurance can be issued:

  • lump-sum payment of the death benefit’s full amount
  • Installments, such as quarterly or monthly
  • An annuity that pays out in installments for the beneficiary’s lifetime
  • Interest payments while passing the principal to another beneficiary later
  • retained asset account, where the insurer holds the proceeds and the beneficiary can make withdrawals as needed

To issue a death benefit, insurers typically require a completed claim form, copies of the insurance contract, and a death certificate.

Proceeds from life insurance death benefits avoid probate, allowing for quicker payment. Probate is the legal process of validating a will. But if no beneficiary is named, the insurer pays the proceeds to the insured’s estate, which may then be subject to probate.

Types of Life Insurance Death Benefits

Types of death cover insurance benefits include all-cause death benefits, accidental death benefits (ADB), and accidental death and dismemberment benefits (ADDB). Here’s a closer look at each type:

  • All-cause death benefit: Paid from a standard life insurance policy for all death causes except those explicitly excluded in the policy.
  • Accidental death benefits (ADB): Payment from a rider added to a life insurance policy for death resulting from covered accidents.
  • Accidental death and dismemberment benefits (ADDB): Rider on life insurance policies that covers deaths from accidents and includes benefits for accidental dismemberments, such as the loss of body parts or functions.

There are also different types of death benefits when it comes to structure:

  • Fixed death benefit: This type of death benefit remains constant and unchangeable. Whole life insurance policies often come with fixed death benefits, as do some term life insurance policies.
  • Adjustable death benefit: Some universal life insurance policies offer adjustable death benefits, letting you increase or decrease the amount, within certain limits, while the policy is active. Changing the death benefit will affect your premium payments.
  • Graded death benefit: A graded death benefit pays out a reduced death benefit if you die from a health condition during the first few years of the policy. Policies without extensive health questions or medical exams – like guaranteed issue life insurance — usually have graded death benefits.

Is a Life Insurance Death Benefit Taxable?

Life insurance death benefits are generally not subject to ordinary income tax. However, annuity beneficiaries might owe income tax on death benefits. Death benefits from pensions differ and may be taxable.

If the life insurance death benefit is paid in a lump sum, it’s not taxable. If paid in installments with interest, the interest portion is taxable. Additionally, if the death benefit is paid to an estate, it could be subject to federal or state estate taxes if the estate exceeds the exemption threshold.

Who Can Claim a Death Benefit?

You can claim a death benefit if the policyholder listed you as a beneficiary. Often beneficiaries are the insured person’s spouse or children, but they can be anyone, including a charity. Beneficiaries can use the money however they want. 

If there’s no beneficiary — for example, if the beneficiary died before the policyholder — the death benefit will go to the estate.

How Do You Find Out If You’re a Beneficiary of a Death Benefit?

To find out if you’re a beneficiary of a death benefit, you can use the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service. Don’t rely on the insurer to tell you, because payouts don’t happen automatically.

To claim a death benefit, beneficiaries need to submit death claim forms and a copy of the death certificate to the insurance company.

Life Insurance Death Benefit vs. Cash Value

A life insurance death benefit is how much money your beneficiaries will receive upon your death. Cash value is money that accumulates over time in your life insurance policy, and you can borrow against it while you’re still alive.

If you withdraw cash value from your life insurance policy, it reduces the future death benefits payable to your beneficiaries. If you die, any remaining cash value in your policy reverts to the insurance company, which then pays the death benefit to your beneficiaries. Some policies offer a rider that combines your cash value with the death benefit, increasing the payout for your heirs — but this feature comes with much higher premiums.

Cash value and death benefits both depend on how much you pay in premiums. The higher the death benefit you want, the more you must pay in premiums. Similarly, higher premium payments allow your cash value to grow faster.

How to Calculate Death Benefit for Life Insurance

To calculate your death benefit for life insurance, take the face value of your policy, then subtract policy loans you haven’t paid back or withdrawals you’ve made from the cash value. For example, if you have a $400,000 term life insurance policy, your beneficiaries’ payout will be $400,000. Term life insurance doesn’t have cash value to withdraw from or borrow against.

FAQs About Death Insurance

How Long Does It Take for Death Benefits to Be Paid?

Death benefits are usually paid within 30 days of you filing the claim.

How Is Death Benefit Calculated?

A death benefit is calculated by taking the life insurance policy’s face value and subtracting any loans or withdrawals from that amount.

Is Death Benefit From Life Insurance Taxable?

No, the death benefit from life insurance is not taxable in almost all circumstances. The exceptions include death benefits paid as annuities, in interest-bearing installments, or to an estate.

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