What is a death benefit in a life insurance policy?

What is a death benefit?

The death benefit in a life insurance policy is the amount of money paid to the beneficiary (the person you choose to give the money) when the policyholder (person insured) dies.

How does a death benefit work?

When you buy a life insurance policy, you pick a death benefit and name a beneficiary who will get the payout.

Let's say you buy a life insurance policy with a $100,000 death benefit. If you pass away, the insurance company would pay $100,000 to the person you named as your beneficiary. This money can help cover

• Funeral costs
• Debts you may owe
• Financial support to your loved ones

What are the different types of death benefits?

• Accidental death benefit: This only pays out if the insured dies due to a qualifying accident listed in the policy.
• All cause death benefit: Pays out regardless how the insured dies, unless specifically excluded from the life insurance policy.
• Accidental death and dismemberment: Pays out if the insured dies due to an accident, as well as for other qualifying major injuries such as the loss of a limb, paralysis, or blindness.

Who receives the death benefit?

The payout of a life insurance policy, or the death benefit, is paid to the person or entity named as the beneficiary.

When you buy life insurance, one of the first things you'll do is name your beneficiary. You can pick one or multiple beneficiaries. You may also be able to choose secondary beneficiaries - those that will get the money if your primary beneficiary dies before you do.

What are the main types of death benefit payout options?

You or your beneficiary typically pick the how the payout is made. It's important you understand your options and what best fits your beneficiaries' needs.

• Lump-sum: This is the most common payout option where the entire death benefit is paid at one time.
• Installment: The death benefit is paid out in installments over a specified period time.
• Annuity: The death benefit is converted into an annuity, which then makes regular payments over a certain period or for the lifetime of the beneficiary.
• Retained Asset Account: The insurance company retains the death benefit but gives the beneficiary check-writing privileges to draw from the payout.

Does the beneficiary pay taxes on the death benefit?

In general, no. The death benefit payout from a term, whole, or universal life insurance policy isn't considered part of the beneficiary's gross income. This means it typically isn't subject to income or estate taxes. However, there are specific cases when a life insurance payout may be taxed.