For many people, the financial protection of a life insurance payout is the main reason for buying a life insurance policy.
These benefits can act as a financial safety net for people who rely on your income or those who might face economic hardships if you were to die. But the monetary benefits your loved ones receive after your death vary depending on a few factors.
What are life insurance death benefits?
A life insurance death benefit is the payout your loved ones receive if you die while your policy is in effect.
If you have term life insurance, your beneficiaries will get the death benefit if you die during the term. This may be 1 to 40 years, depending on how long your policy lasts. If you outlive your policy, your loved ones won’t get any money.
The funds beneficiaries receive are typically tied to your life insurance face amount. Let’s say you have a $500,000 term life policy. If you die while the policy is active, the payout will be $500,000.
For permanent life insurance, which usually lasts your entire life, that final amount will be adjusted. Beneficiaries receive the death benefit minus any outstanding loans or withdrawals.
To use the same $500,000 policy example, say you borrowed $50,000 from your cash value and died before paying it back. Your beneficiaries would get the death benefit minus the borrowed value and any interest owed.
» MORE: Cash value life insurance
Did you know...
The death benefit amount is also one factor that affects your life insurance rates, along with your age, health and how long the coverage lasts. So a policy with a $250,000 death benefit will likely cost less than one with a $500,000 or $1 million death benefit. Loading
Types of life insurance death benefits
The face amount of your life insurance policy is usually considered an “all cause” death benefit. This means the life insurance payout is guaranteed regardless of how you die unless it’s a cause specifically excluded by the policy.
There are a few other types of death benefits that might also be included in your policy.
Accidental death benefit
This life insurance policy feature is an add-on that might pay out an additional death benefit if you die in a qualifying accident.
Accidental death and dismemberment benefit
Besides paying out if you die in an accident, major injuries could trigger the payout of an accidental death and dismemberment (AD&D) death benefit. AD&D coverage can be bought as stand-alone insurance or a policy add-on. It allows access to the death benefit for serious injuries like losing a limb, blindness, or partial or complete paralysis.
Increasing death benefit
Most life insurance death benefits are level benefits. This means no matter when the death occurs, the payout would remain the same. However, some policies offer an increasing death benefit. This payout is designed to increase over time to cover future financial responsibilities. Note that premiums for increasing death benefit policies may go up as the death benefit increases.
Decreasing death benefit
You can also have a policy with a death benefit that decreases as time goes on. These kinds of benefits are designed to address financial burdens like mortgages that should decrease over time.
» MORE: Increasing term life insurance
How does the life insurance death benefit work?
When you buy a policy, you’ll name a life insurance beneficiary. This can be a person or an entity, like a trust or charitable organization. You can also name more than one beneficiary and decide how to divide the money between them.
To get the death benefit, your beneficiary will file a life insurance claim with the company that issued your policy. This involves filling out a claim form and providing supporting documents, such as a certified copy of the death certificate. The death benefit typically avoids probate and is paid out to the beneficiary shortly after the insurer approves the claim.
How much death benefit do you need?
If you’re not sure how much of a death benefit you should leave behind, use our life insurance calculator.
This will help you crunch the numbers, including how much income your loved ones would need to replace if you died. It accounts for any financial obligations you may leave behind (like a mortgage) and any final expenses you’d like to cover.
How would you like to estimate your needs?
Quick and basic
Sometimes, a quick ballpark estimate is all you need to get started. You can always come back and work it out in more detail later.
Detailed
You can get the most accurate picture of your life insurance needs by taking a detailed look at your assets, expenses, debts and goals.
Who should receive your death benefit?
You can choose anyone to be your life insurance beneficiary. This includes not just people, but also organizations and trusts. Consider who might have the greatest financial burden upon your death before selecting your beneficiaries.
Your life insurance beneficiaries can include:
- 👤 A person, like your spouse.
- 👤👤👤 Multiple people, like your children.
- 📑 A trust.
- 🏛️ Your estate.
- 🤝 A charitable organization.
- 💼 A legal entity, like your business.
You can identify more than one person to receive your death benefit, although some insurers may place limits on how many beneficiaries you can name.
🤓 Nerdy Tip
Your beneficiaries can usually choose how they’d like to receive the life insurance payout. Options often include a lump sum, installments, or an account that earns interest and lets beneficiaries decide when and how much to withdraw. Are life insurance death benefits taxable?
Life insurance death benefits typically aren’t subject to income tax if you’re the policy’s beneficiary. However, any interest you earn on the benefit is considered taxable and needs to be reported to the IRS.
If you’re worried about whether to claim the proceeds of a death benefit as income, it’s best to consult with a tax professional before filing your taxes.
» MORE: Taxes & life insurance
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Frequently Asked Questions
Can insurers refuse to pay out the death benefit to my beneficiaries?
It is unusual, but insurers might refuse to pay out a death benefit in certain situations. In some cases, this is because the policy has lapsed due to non-payment or has expired. If the death was the result of suicide during the policy’s waiting period (usually the first two years), the insurer may deny the claim and return any premiums paid.
And lastly, if the policyholder lied on the application, committed fraud or the death was the result of criminal activity, insurers could withhold a payout.
Can I buy life insurance with an immediate death benefit?
Life insurance doesn’t pay out immediately — beneficiaries typically receive their benefit within 30 to 60 days of filing a claim. To start a life insurance claim, you’ll need to contact the insurer and submit a claim form and supporting documentation.
Does the insurance company notify beneficiaries of a life insurance death benefit?
Not usually. Life insurers don’t have to contact beneficiaries and often don’t know the policyholder has died. That’s why you should tell your beneficiaries that they will receive a death benefit and make sure they understand how to file a life insurance claim.
