Jessica Fox Last Updated On: June 27, 2023

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What Is a Life Insurance Death Benefit?

Life Insurance Death Benefit

Thinking about death while you’re still living may seem morbid, and it likely isn’t something you want to think about, but if you’re going to protect your family after you pass on, you should take the time to ensure you have the right life insurance. 

One of the primary functions of life insurance is providing your family with a death benefit when you pass away. Think of death benefits as a tax-free payout from your insurance company to your beneficiaries—so long as your premiums are up-to-date. 

However, there’s more to death benefits than just a large payout.

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What Are Death Benefits?

Death benefits, in a nutshell, are the dollar value of the life insurance policy you’ve taken out. Let’s say you purchase a life insurance policy for $500,000, then when you pass away, your beneficiaries will receive $500,000.

Death benefits are tax-free and paid out as a lump sum or annuity (a fixed annual rate paid to beneficiaries).

Who Can Receive The Death Benefit Life Insurance?

When you’re filling out the paperwork for life insurance, you can choose who or what entity will receive your death benefits—you aren’t only limited to just family. However, for your beneficiaries to receive the death benefit life insurance, they must be designated in your life insurance policy.

If you’re considering who to leave your death benefit to, these are your options:

  • Beneficiaries: You can your death benefit to one or more family members, friends or whomever you name as your beneficiaries—you also can choose the percentage to leave to each beneficiary. There are some caveats to naming beneficiaries worth mentioning:
    • Heirs: If the policyholder were to pass without a will, the estate goes to the heirs while death benefits go to the designated beneficiaries.
    • Underaged Children: Minors can’t be named beneficiaries, but they can have the death benefit amount willed to them in trust. 
    • Spouse Permission: States with common property laws require the spouse to be the beneficiary or that they agree to an alternative.
    • Entities: You aren’t limited to just giving the death benefit funds to your family; you can also elect to leave funds to charities, businesses, or family trusts.

Beneficiaries aren’t set in stone; you can set up beneficiaries as revocable (remove without permission) or irrevocable (consent required).

When Do Death Benefits Payout?

The death benefit life insurance isn’t automatic; for your beneficiaries to receive the funds, they have to fill out a death claim to notify the insurance company of your passing. To file a death claim, you need a copy of the death certificate, and from there, the insurance company will review the claim. Then, if the claim is approved, the funds are released – usually, it takes 14-60 days – for the beneficiaries to receive the death benefit payout.

How Death Benefits Payout?

When you purchase your life insurance policy for $500,000, your beneficiaries will receive the full $500,000 as a lump sum payment, in trust or as annuities upon your passing. Ultimately, as the policyholder, you have the freedom to structure the payout as you wish.

Funds are available via check or direct deposit into the bank account provided on the death claim form.

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Death Benefit Reductions

Under certain circumstances, insurance companies will adjust the payout to reflect new information. For example, if the policyholder intentionally lied—committing insurance fraud— about their state of health to get cheaper rates, insurers reserve the right to adjust the death benefit. This means the insurance company will recalculate what the policyholders premiums should have been and adjust the payout to reflect this new information.

Accelerated Death Benefits

Suppose you have a terminal illness with a life expectancy of 6 months – 2 years. In that case, the policyholder can apply to access their death benefits while they’re still living to relieve the financial strains on their family. However, if you accelerate your death benefits, your beneficiaries will receive a lower death benefit payout.

Death Benefit Life Insurance

Although most people don’t want to think about dying, the one thing you want to hammer out is what you can financially do to support your beneficiaries after you pass on. 

We can all agree that leaving our loved ones both emotionally and financially vulnerable isn’t something we want weighing on our conscience; that’s why we have life insurance. Life insurance is a means of providing for our loved ones without us being there, so don’t neglect to buy life insurance if you want to continue providing for your family after you’ve gone.

Jessica Fox Jessica Fox has been a freelance writer for five years, with a specialty in health, wellness, and insurance. During this time, she’s written for some of the biggest B2B and B2C brands from around the world. Jessica is also the mother of two young daughters and loves coffee, writing, and working out.

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