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When an individual who has life insurance passes away, their beneficiaries become eligible for the policy’s death benefit. So, what is a death benefit? The short version is that a death benefit is the coverage amount on the policy minus fees and potentially, other costs. Indeed, this benefit is the main reason people purchase life insurance. When planning for difficult eventualities, people may use life insurance to safeguard against the financial consequences that their family or business may face when they die. For instance, single-income households often use life insurance to protect against the financial struggles that survivors would face if the household income earner were to pass away. Bankrate’s insurance editorial team explains life insurance death benefits and how they work so you can better understand what the term means when shopping for life insurance.
What is a life insurance death benefit?
The life insurance death benefit amount is the amount of coverage that you purchase, and the amount that will likely be paid out to the beneficiary of a life insurance policy after the insured passes away. Life insurance beneficiaries could be a spouse, children or other living heirs, friends, charities or trusts. Funds from the death benefit amount could be put toward funeral expenses or paying off the deceased’s debts, as well as future living expenses, college tuition and more. A higher life insurance death benefit is often associated with more expensive monthly premiums, and may require additional steps, including showing proof of need for a high coverage level.
While some would assume that the insured can’t touch the death benefit during their lifetime, this isn’t necessarily the case. Some policies offer living benefits, which can help the policyholder access their death benefit amount if they’ve been diagnosed with a terminal or chronic illness. Additionally, although not part of the death benefit, permanent life insurance, in contrast to term life insurance, comes with a cash value component that can be withdrawn, although it accumulates relatively slowly and may affect your death benefit amount. Policyholders can also take a loan against permanent life insurance policies, although if left unpaid at the time of their death, the unpaid amount will be deducted from the death benefit.
How does the payout process work?
If you are the beneficiary on someone’s life insurance policy, it’s important to understand how the payout process works. After the insured passes away, you’ll need to take a few steps to inform the life insurance company and receive the funds. While it can be a good idea to reach out to your life insurance company for specifics, filing a life insurance claim typically involves the following:
- Obtain the death certificate. The life insurance company will need to see a copy of the policyholder’s death certificate to ensure that the policy can be paid out.
- Locate the policyholder’s life insurance policy documents. This will include important information like how much the policy is worth, who the beneficiary is and how to file a claim. If you don’t have access to the policy documents, you can use the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service.
- Contact the life insurance company. Notify the life insurance company that the policyholder has passed away.
- Initiate the claim process. You will need to provide the policyholder’s death certificate and fill out some paperwork, including a form called a “request for benefits.” This form will ask you to fill out various information about the policyholder and will ask you to choose how you would like to be paid.
- Wait for the death benefit to process. Once the insurance company confirms the policyholder’s death, validates your status as a beneficiary, and ensures the policy is in good standing, you should receive the death benefit. This can take a few weeks or a few months, depending on the claim.
Death benefit payout options
The payout of a life insurance death benefit can be determined by the policyholder when setting up the policy or, sometimes, by the beneficiary when they receive the funds. Some of the payout options for a death benefit could include:
- Annuity: If you choose the annuity option, the life insurance company puts the death benefit into an annuity investment account. Every year, the beneficiary receives a portion of the death benefit plus the interest it earns until the money runs out.
- Lump sum: The most common option is to receive the death benefit in one lump sum. You can either receive a check for the full amount or have the money wired into a bank account electronically.
- Installments: With installments, also known as the specific income option, the beneficiary receives the death benefit in batches over a set period of time. They continue to receive the payments until the death benefit runs out. Unlike annuities, installments are not paid out of an investment account.
- Retained asset account: Retained asset accounts are essentially cash value checking accounts that earn interest. This option can be attractive to those who want access to their money in a lump sum while also earning interest from it. Permanent life insurance policies utilize similar accounts wherein the death benefit is partially paid in a savings account.
Why a death benefit claim might be denied
After a life insurance claim has been filed, the life insurance company will begin to review the claim and policy terms. If the policyholder has failed to make payments on the life insurance policy, or if their death falls under some cause or manner that is specifically excluded in their policy, these could be grounds for denying a death benefit claim.
Additionally, during the first two to three years of a life insurance policy’s effective date, life insurance companies have a contestability period. During this time, insurers could also deny claims based on specific policy exclusions, such as acts of war, suicide, life-threatening hobbies and more. Your life insurance agent will be able to answer specifics on how the insurer handles life insurance claims and contestability.
Frequently asked questions
Like other insurance products, life insurance is heavily influenced by personal variables. Your age, health and more can all impact which companies will offer you life insurance and how much you can expect to pay for it. As a result, the best life insurance companies for one person may not be the best for another. Consider selecting a few companies that interest you, then request quotes to determine which one is right for you.
Choosing a death benefit payout starts with determining how much life insurance you need. Consider what your purpose for life insurance is, whether it’s to pay for your own medical costs, your family’s future expenses, college education or something else entirely. Bankrate’s life insurance calculator can also help give you a place to start.
A life insurance beneficiary does not have to be a person. In fact, it’s possible to name an organization, like a charity or religious entity as your beneficiary if you’d like to make a donation with the life insurance payout after you’ve passed.
There are many different types of life insurance. In addition to the more-common term and permanent life insurance policies, there are a slew of additional policy types available. For instance, accidental death and dismemberment policies, sometimes called death insurance, are designed to pay out if you die or are injured to the point where you can’t work. Another example would be company-held life insurance policies, sometimes called dead peasant insurance policies. With this type of life insurance, the company holds the policy and receives the payout.