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What is a life insurance death benefit?

A death benefit is the payout from a life insurance policy — but it isn’t automatically paid out.

If you’re familiar with life insurance, you might know that beneficiaries receive a payout when the policyholder passes away. This is known as the “death benefit” — and if you’re a beneficiary, you’ll need to take steps to claim it.

What is a death benefit?

A death benefit is a payout to the beneficiary of a life insurance policy when the policyholder dies. It’s typically paid in a lump sum, but the policyholder can instruct the insurer to pay the death benefit in installments.

In most cases, the death benefit is equal to the face value of the policy. For example, if you take out a $250,000 life insurance policy, your beneficiaries will receive $250,000 when you die. You can nominate multiple beneficiaries, and allocate how much money should go to each.

How can I claim a death benefit?

When a policyholder dies, it’s up to the beneficiary to file a claim. The insurance company has no obligation to notify the beneficiary and let them know they’re owed a payout.

Here’s what to do:

  1. Contact the insurance company to inform them of the policyholder’s death. If you’re unsure about which company issued the policy, you can search the National Association of Insurance Commissioners’ Life Insurance Policy Locator database.
  2. Request a certified copy of the death certificate from the funeral home, cremation organization or the state’s vital records office. You’ll want to request several copies since the insurance company won’t be the only place that needs a copy.
  3. Fill out the claim form — or “request for benefits” form — given to you by the insurer.
  4. Submit the death certificate, claim forms and any other supporting information to the insurer.
  5. The insurance company will then confirm the policyholder’s death and review the claim. Once the claim is approved, it’ll pay out the policy.

How to file a life insurance claim

When am I eligible to receive a death benefit?

If you’re listed as a beneficiary on a life insurance policy, you’re entitled to the death benefit. The policy specifies the amount of money you’ll receive, and when it will be paid out.

Since the onus is on the beneficiary to make a claim, if you’ve taken out a life insurance policy, it’s important to tell your beneficiaries. When you die, they won’t need a copy of the policy to submit a claim, but they will need to know which insurer holds the policy.

What happens if the policyholder didn’t name a beneficiary?

In this case, the insurer will typically pay the proceeds to the policyholder’s estate.

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How to find out if you’re a life insurance beneficiary

The easiest way to figure this out is to ask the policyholder while they’re still alive. If the policyholder has already died, these are your options:

  • Look for their life insurance policy among their paperwork.
  • Check with your state’s insurance department.
  • Use the National Association of Insurance Commissioner’s (NAIC) or Medical Information Bureau (MIB)’s policy locater services. The MIB charges $75 to run a search.

When is the death benefit paid out?

Most insurers pay death benefits a week or two after approving a claim — but some take as long as 60 days.

If the policyholder dies within the first two years of purchasing a policy, the insurer might investigate the claim further. This two-year time frame is known as the “contestability period.”

If the insurer discovers the policyholder lied or withheld information on their application during this time, it can deny or reduce the death benefit — even if the cause of death was unrelated to the details the policyholder omitted. That’s why it’s important to be transparent in your application.

How is the death benefit paid out?

Let the insurer know your preferred payment method on the claims form. Generally, you can elect to receive the death benefit via a check or direct deposit into your bank account.

Depending on the insurer, you might also be able to convert the death benefit into an annuity.

What is an accelerated death benefit?

An accelerated death benefit is a rider you can add to your policy at the time of purchase. If you’re diagnosed with a terminal illness, your insurer will pay out a portion of the death benefit to help you cover medical and end-of-life expenses. When you die, your insurer will deduct this amount from your beneficiaries’ payout.

How much is the death benefit amount?

Usually, beneficiaries receive the dollar figure that’s laid out in the policy. But there are a few situations where they may not get the full death benefit:

  • The policyholder lied on their application. If the insurer discovers false information while investigating a claim, it has the right to decrease the death benefit — or deny it altogether. If it chooses to decrease the death benefit, it’ll typically subtract the premiums the policyholder would have paid had they been truthful in their application.
  • The policyholder adjusted the death benefit. With universal and variable life insurance, policyholders have the freedom to change the death benefit amounts as they please. This means their beneficiaries might not receive the original amount that was specified in the policy.
  • The policyholder took out a decreasing term life insurance policy. This coverage is designed for people who know their need for life insurance will lessen as time goes on. As a result, the death benefit gradually decreases — either monthly or annually — over the life of the policy.

Are death benefits taxed?

Fortunately, a death benefit isn’t taxable income. There’s one exception to this rule. If your estate is valued at $11.58 million — the IRS threshold for 2020 — or more, it will be subject to federal estate taxes. This includes the life insurance payout.

How can I spend the money from the death benefit?

You can spend the money however you wish — there are no rules. Most people use it to pay the policyholder’s funeral or burial costs, pay off debt, cover living expenses and fund large purchases — like college tuition.

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Bottom line

The main purpose of life insurance policies is to leave your loved ones money when you die. This dollar amount is the death benefit, and it can be distributed however you like. It’s typically not taxed, but your beneficiaries will need to file a claim to receive the money they’re owed.

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