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Life insurance death benefits

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Being a beneficiary of someone’s life insurance policy can provide financial support when dealing with the death of a loved one. But before you receive any money, it’s important to understand how death benefits work. That way, the claims process will be as easy and stress-free as possible, with no surprises to deal with along the way. 

What is a death benefit?

A simple death benefits definition is the amount of money in a life insurance policy that’s paid out to the beneficiary when the policy holder dies. The policy holder paid a premium in the preceding years in exchange for being able to leave behind a set amount of money. Oftentimes, the beneficiary is the surviving spouse or children of the policy holder — or a combination, since it’s possible to have multiple beneficiaries. 

How much does a death benefit pay out?

A death insurance policy comes with a predetermined amount for the benefit. When the individual originally took out the policy, the premium rate was determined based on a number of factors, including age, health and the type of life insurance policy

But another factor influencing the cost of life insurance is the amount of the death benefit. The higher the pay out, the more the plan costs. Depending on the person’s stage in life, they may choose enough to cover remaining debts (like a mortgage or auto loan) so the surviving spouse doesn’t need to worry about major financial burdens. If the life insurance policy is valued at $500,000, then the beneficiary would receive that amount at the time of the policy holder’s death.

There are also smaller policies available, like burial insurance. The pay out is usually lower and is designed to cover funeral and burial costs. 

Requirements for payout of death benefits

In order to receive a payout, the beneficiary must file a claim with the insurance company. It’s important to know the company the deceased used for the policy since the beneficiary has to initiate the process. There will be a number of claims forms to fill out and the insurer also needs to review the death certificate. Who claims the death benefit? Anyone listed as a beneficiary. Since there can be multiple beneficiaries, each person must complete a separate claim in order to receive the payment. 

When do you receive the death benefit payment?

It can take as long as weeks or months for a death benefit to actually be paid out. The process can be slowed down even further if the policy was only open for two years or less prior to the policy holder dying. There may need to be an investigation to make sure no fraud is present.

In most cases, however, following these steps can help expedite the claims process:

  • Identify the life insurance company. Ideally, the beneficiary received the insurance information directly from the policy holder. This makes it easy to contact the company and initiate the process.
  • File a claim. Once you’ve identified the insurer, go through their claims process. This typically includes filling out a request for benefits form.
  • Include a copy of the death certificate. The insurer needs to make sure the cause of death wasn’t an excluded reason, such as suicide or high-risk activities like sky diving.
  • Wait for payment. Insurance companies typically take between 30 and 60 days to review a claim and process payment.

How is the death benefit paid?

When you fill out the claim form, you’ll choose how you want to receive payment. Typically, you can opt for a check to be mailed to you or give the company your bank account information for direct deposit. Death benefits are usually paid as a lump sum. 

In some cases, however, you may choose to receive an annuity. This spreads out the money as annual payments. This acts as an ongoing source of income rather than managing a large sum all at once. There are a number of ways to structure these payments and potentially keep the unpaid money in low-risk investments. 

Can the death benefit amount decrease?

There are some scenarios in which the death benefit is lower than what the policy holder planned for. One situation is if the insured person lied about their health or medical history on the original application. If any inconsistencies are found when the company reviews the claim, the policy could be decreased or cancelled altogether.

The death benefit may also be lower if the policy is an adjustable life insurance policy. The benefit can change based on the needs of the insured, such as lowering the annual premium to make payments more affordable. 

Finally, some permanent life insurance policies come with a cash value component. Rather than decreasing the death benefit, this feature can actually increase the pay out if the insured individual never used the money in the cash value account.

What is an accelerated death benefit?

This type of death benefit helps with medical and care expenses when the policyholder receives a terminal diagnosis. Instead of having to pay expensive fees out of pocket, the individual can tap into the death benefit early. An extra rider may be required to access this cash early.

The beneficiary does receive a lower amount when an accelerated death benefit is used. But it can also help avoid medical debt in the weeks or months leading up to the individual’s death — not to mention taking off an extra layer of stress during an already difficult time.

Is the death benefit taxable?

In most cases, the beneficiary won’t have to pay any taxes on death benefits received from a life insurance policy. But there are a few exceptions to this rule:

  • Premiums paid with pre-tax money. Some employer-sponsored plans allow the policyholder to fund the life insurance policy with pre-tax income. Since no income tax was paid on those funds, the death benefit may be taxed.
  • Structured with a trust. Some trusts, such as those paid out to a minor, may require income tax payments when disbursements are made.
  • Gains made with cash value component. A whole life policy with an invested cash value may be subject to capital gains tax. The tax rate depends on how long the investments were held before selling.

The takeaway

  • Death benefits are paid to named beneficiaries in a life insurance policy.
  • The claims process can take a couple of months to finalize, and longer if the policy was only open for two years or less.
  • In most cases, death benefits are not taxed.

The easiest way to navigate the death benefit payout process is to know the name of the deceased’s life insurance company. That way, you just have some minor paperwork to fill out in addition to sending a copy of the policyholder’s death certificate. You’ll find some flexibility in the payout process, although most people choose to receive a lump sum payment.

Lauren Ward

Lauren Ward is a writer for Coverage.com. She specializes in all things personal finance, including insurance, loans, and real estate.

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