What Is a Death Benefit?
A death benefit is a sum of money paid out to the beneficiary or beneficiaries of a life insurance policy, as long as the insured died while the policy was in effect. The death benefit is the primary purpose of buying life insurance coverage; its what your premium payments cover throughout the life of your policy. Summary of Moneys guide to death benefits  Life insurance pays out a tax-free death benefit if your policy is active when you die. There are several different types of life insurance policies, but the main categories are term life insurance  the more affordable option  and permanent life insurance. Term life insurance policies are in force for a set period or term, which typically range in length from 10 to 30 years. If the insured dies within the policy term, the insurer pays out a death benefit equal to the policys face value. Unlike term life insurance, permanent life insurance policies such as whole life insurance do not have an expiration date. Rather, they remain in force as long as premiums are paid. If the insured dies while the policy is in force, the death benefit is paid out to the beneficiaries. Lump-sum payments vs. annuitized payments  The most popular ways to cash out a death benefit is receiving it as a lump sum payment or as an annuity  a monthly or annual payment. Most beneficiaries choose the lump sum payment and work with their financial planner or advisor to set up a financial plan. With a lump sum payout, you will receive the total amount of the benefits tax-free. This money can be used to pay for funeral expenses, mortgage payments and income replacement. When you fill out the death benefit claim, you can choose if youd prefer a direct deposit or a check. If, on the other hand, you choose to annuitize your death benefit, the funds would be put in an investment account called an annuity. From there, beneficiaries can receive monthly or annual payments for a set number of years  typically 10 to 30. The annuity earns a modest but steady amount of interest. The main difference between an annuitized death benefit and a lump-sum payment is that the lump-sum payment is tax-free, while a portion of the income stream the annuity provides could be taxable. Whole life insurance and other permanent life policies feature a savings component called cash value, which functions as a guaranteed investment that grows at a slow rate. The cash value savings component is a living benefit, meaning it will be paid to you while youre alive should you ever decide to surrender the policy. However, the cash value wont increase the death benefit your life insurance beneficiaries will receive upon your death. For example, if you had a $1 million policy with $500 in the cash value savings component, your heirs would only receive $1 million upon your death, according to Todd B. Hall, CFP and director of financial planning at Homrich Berg. However, you could add an optional insurance rider that would pay out both the cash value and the face amount of the whole life policy. This rider would increase your premiums further compared with a term life insurance policy with the same death benefit. You can also take loans from the funds available in your cash-value account, but if you dont repay them, the outstanding loan amount will be deducted from your beneficiaries death benefit. How to claim a life insurance death benefit  Once the life insurance policy owner dies, the designated beneficiary or beneficiaries can claim the death benefit. They can do so by submitting a copy of the insureds death certificate, along with the policy number, with the life insurance claim form. Life insurance companies typically take up to a month to review a claim before paying out the death benefit. They may request further documentation. Documents required to file a life insurance claim  Certified copy of the death certificate  Life insurance policy document or policy number  Claim form  Steps to filing a life insurance claim  Call the insurer with the policy number and the insureds details. Complete and submit a life insurance claim form (some companies have an online process, while others send a letter). Attach a copy of the death certificate and other required documents. Allow 5-7 days for processing and approximately 30 to 60 days to receive the funds. Once the claim is submitted, determine how the proceeds will be distributed. Ads by Money. We may be compensated if you click this ad. Ad A proper life insurance policy will protect your loved ones from the unexpected. No time like the present to get on the estate planning path. Do it right with life insurance and take care of your family. Click below for more information. According to a spokesperson for the American Council for Life Insurers (ACLI), less than 0.5% of life insurance claims were disputed at the end of 2019. Although it is not common for claims to be denied, theres a variety of reasons why your death claim might be rejected. A lapsed policy  For a life insurance policy to pay out, the policy must be in force, meaning the policyholder was actively making payments to it. If they neglected to make payments and the grace period expired, the policy could lapse, and the death benefit claim could be denied. Mark Walker, owner of Lifetime Insurance Solutions, suggests contacting your life insurance agent right away to discuss your options if youre having trouble paying your life insurance premiums on time. They may be able to help you get back on track before there is a lapse in your coverage. Material misstatements  Misleading or false statements on your life insurance application could lead to your beneficiaries claim being denied. This includes providing incorrect information about your age or medical history or those of your parents. Exclusions  Some life insurance policies have exclusions for fatalities caused by risky activities such as skydiving, scuba diving, piloting a plane and rock climbing. Suicides are also excluded from coverage for up to two years during whats known as the policys contestability period. If your life insurance claim is denied, hiring a lawyer could be your best bet to dispute it. Death benefits are paid out to the beneficiaries you named on your policy. Your life insurance beneficiaries can be one or more persons, a trust that is managed by a trustee, a charity or your estate. You can set up primary beneficiaries and contingent beneficiaries. If you die, your primary beneficiaries are the first in succession to receive the death benefit. If your primary beneficiaries die before you, the death benefit will go to your secondary or contingent beneficiaries. Beneficiary designations can be changed at any time, but you should update this information whenever you experience a life event such as a marriage or divorce. The death benefit will be paid out to the person or persons listed on the beneficiary designation, regardless of the instructions on your will. Most funeral homes request payment up-front, so your surviving family members will have to pay for the expense out of pocket. According to Walker, the amount depends on whether you choose cremation or burial, which can range between $7,000 to $12,000. The death benefit, then, should exceed these costs. Some life insurance companies will also offer an expedited payout for funeral expenses, says Neel Shah, estate planning attorney and CFP at Beacon Wealth Solutions. Theres also the option to pre-pay for your funeral expenses, so your heirs dont have to come up with the money after you die. If you believe youre the beneficiary of a policy, you can take steps to find and obtain your benefits. According to Wilson Coffman, founder of Coffman Retirement Group, you should first check your loved ones bank and credit card statements for any payments made to insurance carriers. Secondly, contact any current or past financial advisors to see if one of them sold the deceased a policy. You can also contact the human resources department at their last workplace to see if they provided an employer-sponsored life insurance policy. Finally, try to access the deceased persons email account and search for any information on life insurance policies. Theres no time limit on filing a life insurance claim, so dont worry about being late with your request for life insurance proceeds. That said, filing promptly after the insureds death will of course speed up the payout process. To file a claim, you should contact the insurance company or go online to start the claim process. If you have a policy with an accelerated death benefit provision, you could receive a portion of your life insurance death benefit while you're alive. Accelerated death benefits are available to those diagnosed with a terminal or chronic illness, but some policies require the policy owner to have a life expectancy of two years or less to collect on the provision. Depending on the policy, some disabling illnesses may also qualify you to receive an accelerated death benefit. That amount could range between 50 and 80% of the value of the policy. Summary of Moneys guide to death benefits  A death benefit may be disbursed in a lump sum payment or monthly or annual annuity installments. Lump-sum payouts are tax-free, but annuity payments are taxed. To file a death benefits claim, you need a copy of the death certificate, the life insurance policy information and the claim form. Some causes of death, such as those from risky activities or suicide, may be excluded from coverage, at least for a certain period.