Understanding Life Insurance: Death Benefits Explained

A death benefit is a payout to the beneficiary of a life insurance policy when the insured person dies. The death benefit is the main reason people purchase life insurance, providing financial security for loved ones left behind. The amount of money a beneficiary receives depends on the policy purchased, which can range from a few thousand to millions of dollars. The death benefit is typically paid in a lump sum, but beneficiaries may also have the option to receive it in installments. While the death benefit is generally not subject to income tax, there are certain circumstances in which it may be taxable.

Who receives the death benefit?

The death benefit from a life insurance policy is paid out to the beneficiaries chosen by the policyholder. These are usually members of the policyholder's family, such as a spouse or adult children, but can also be multiple individuals, businesses or charities. The policyholder can also determine the exact percentage of the death benefit that each beneficiary will receive.

It is important to note that minor children cannot be direct recipients of the death benefit. Instead, the policyholder can direct the proceeds to a trust and dictate how the funds are used and when. The policyholder should also periodically update their beneficiaries, especially after major life events such as getting married, buying a house or having a child.

If there are no living or named beneficiaries, the death benefit is paid to the insured's estate and distributed according to their will or, in the absence of a will, according to state laws.

To receive the death benefit, beneficiaries must first file a death claim with the insurance company by submitting a certified copy of the death certificate. The insurance company will then review the claim and either pay it out, deny it or request additional information.

How much is the death benefit worth?

The death benefit amount is based on the face value of the life insurance policy, with subtractions for any withdrawals you made from cash value or policy loans you didn't pay back. For example, if you bought a $500,000 term life insurance policy, the payout to your beneficiaries will be $500,000. Term life insurance does not have any cash value for policy loans or withdrawals.

When deciding how much money you should provide to your beneficiaries, consider your reasons for buying life insurance. If you want to provide funds to replace your income for 10 years, you could choose a death benefit that closely matches your income multiplied by 10.

The size of your death benefit is one factor that affects how much you’ll pay in life insurance premiums. Other factors include the type of life insurance, your age, gender, health and whether you use nicotine.

The following examples show premium payments for certain death benefit amounts. These are meant for comparison, and your own quotes will differ depending on your age, health and other factors.

Term life insurance death benefit amount:

• Monthly premium for a 30-year-old male: $16. That's $192 annually.
• Monthly premium for a 30-year-old female: $14. That's $168 annually.

Whole life insurance death benefit amount:

• Monthly premium for a 30-year-old male: $115. That's $1,380 annually.
• Monthly premium for a 30-year-old female: $100. That's $1,200 annually.

How is the death benefit paid out?

The death benefit is paid out to the beneficiaries of the policy. The policyholder has a responsibility to share policy or annuity information with beneficiaries when they name them. Once the insurance company is identified, beneficiaries must complete a death claim form, providing the insured's policy number, name, Social Security number, date of death, and payment preferences for the death benefit proceeds. Most states allow up to 30 days for the review of the claim, after which the insurer either pays it out, denies it, or asks for additional information. If an insurer denies a claim to a life benefit, it will typically provide a reason.

The death benefit can be paid out in a few different ways. The most common is a lump-sum payment, which is a single, tax-free payment to the beneficiaries. This is usually paid in the form of a check or a direct deposit. Another option is an installment payment, where the payout is divided into smaller payments and disbursed over a specified period. A third option is a life income option, where the death benefit is used to purchase an annuity, providing the beneficiary with regular income payments for the rest of their life.

In some cases, the death benefit payout can be delayed. For example, if the insured dies during the contestable period, the insurance company may have a right to investigate the claim more thoroughly. Additionally, if the policy has been lost, the company will typically require the beneficiary to complete a lost policy certification, which can cause a delay in the payout.

How to claim the death benefit

To claim the death benefit, the beneficiary must submit a claim to the insurance company within a specified period of time after the insured person's death. The claims process requires specific documents and information to be provided to the insurance company. Here is a step-by-step guide on how to claim the death benefit:

• Determine the insurance company: The key to making a claim is knowing which insurance company holds the policy for the deceased person. This information can be obtained by reviewing the deceased person's bank accounts, cancelled cheques, records, safety deposit boxes, or by contacting their previous employer.
• Obtain a death certificate: A certified death certificate is required to file a claim. This can typically be obtained from a local health department or through the funeral home. It is recommended to obtain multiple certified copies as they may be needed for other purposes, such as closing accounts and utilities.
• File the claim: The beneficiary will need to fill out the required claim forms provided by the insurance company. These forms may need to be signed by the insured person's attending physician or coroner. Along with the forms, the beneficiary will need to submit a copy of the death certificate and any other supporting documentation, such as medical records or a police report.
• Wait for the claim to be processed: There is typically no time limit for submitting a life insurance claim, but it is recommended to file the claim as soon as possible to allow for prompt assessment and payment. The time it takes for the claim to be processed and the payout to be made will depend on various factors, including the accuracy and completeness of the information provided and the inclusion of all necessary supporting documents.
• Choose the payout option: The beneficiary will then need to choose how they would like to receive the payout. The options are typically a lump sum, specific income, life income, or interest income.

It is important to note that there may be instances where a death benefit claim is denied. This could be due to reasons such as the insured person dying within a certain period after the effective date of coverage, concealing or misrepresenting information during the application process, or if the policy had lapsed due to non-payment of premiums. Therefore, it is essential to carefully review the policy and understand the requirements and potential limitations.

Can you lose the death benefit payout?

Yes, there are several circumstances in which a death benefit payout may be lost or lowered.

Firstly, it is important to understand that death benefits are paid out to beneficiaries, so it is crucial that the policyholder shares policy or annuity information with beneficiaries when they are named as such. If the policyholder does not name a beneficiary, the insurer will pay the proceeds to the estate of the insured, which may be probated.

In the case of term life insurance, the death benefit will only be paid out if the policy is still in force when the insured person dies. If the policy expires before the insured person's death, no death benefit will be paid out.

If the policyholder stops paying premiums, the policy will lapse and there will be no death benefit. However, if the policy lapse is very recent, it may be possible for the beneficiary to pay the premiums due and then receive the death benefit.

If the insured person dies within the first two years of the policy being issued, there may be a delay of six to 12 months on the payout while the insurance company investigates the original application to ensure fraud was not committed. If fraud or misrepresentation is discovered, the claim may be denied.

If the insured person dies by suicide, the death benefit may not be paid out if it is within the first two years of the policy being taken out. After this period, the suicide clause will no longer apply.

If the insured person dies while committing a crime or during the course of illegal activity, there may be a delay or denial of the death benefit payout.

If the insured person had a life insurance policy with a cash value account and took out a loan without paying it back, this amount will be subtracted from the death benefit. Typically, if the money in the cash value account is not used before the insured person dies, the cash value reverts to the life insurance company.

In the case of homicide, there may be a delay in the payout while the beneficiary's involvement in the insured person's death is investigated. If the beneficiary is charged in connection with the death, the insurance company can withhold the payout until the charges are dropped or the beneficiary is acquitted.

If the insured person lied on the policy application or omitted health issues or risky hobbies or activities, the death benefit payout may be delayed or denied.

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