What Is a Death Benefit in Life Insurance?

It may sound like an oxymoron, but a death benefit and life insurance actually go hand-in-hand. To be specific, the term “death benefit” refers to the financial payout beneficiaries receive after the insured person passes away—one of the primary reasons to get life insurance. This amount varies based on the terms agreed to by the policyholder. For example, if you get a $500,000 life insurance policy, what that really means is that you have a $500,000 death benefit.

While still living, awareness of this benefit can provide significant peace of mind, knowing you’ll be able to financially protect the people you care about most after you’re gone. More than simply a cash lump sum, it can often be a meaningful and heartfelt message that lives on well after you’ve passed.

Do All Life Insurance Policies Have a Death Benefit?

There are a lot of different life insurance options to consider, and all of them have a death benefit. Let’s start with term vs. permanent or whole life insurance. Term policies are in effect for a specific time period, such as 10, 20 or 30 years. If the insured outlives the term, no death benefit will be paid. (However, term life is convertible to whole life at specific times throughout the life of the policy.) Whole or permanent life insurance, on the other hand, lasts for the insured’s lifetime, providing a death benefit to beneficiaries as long as the policy has not lapsed, and premiums have been paid.

Types of Death Benefits

Understanding the specific types of policies and benefits can be overwhelming, but it doesn’t have to be. Below, we explain a few key terms to understand when looking at insurance options.

• All Cause: A policy that pays out regardless of how the policyholder dies unless specifically excluded by the policy.
• Fixed: A guaranteed payout amount that doesn’t change over the policy’s term.
• Adjustable: A flexible payout that can be increased or decreased by the policyholder based on changing needs or policy terms.
• Graded: A payout that increases over time and becomes fully active after a certain period.

What Are Death Benefit Riders?

A “rider” is an optional add-on to the insurance policy that provides additional benefits to the primary insured, like increasing or adjusting the death benefit. For additional costs, some riders allow policyholders to customize their insurance policy based on their preferences.

A few examples of a death benefit rider include:

• Accelerated Death Benefit: Allows someone with a terminal illness to receive an advance to pay for medical care, up to 50%. (Terminal is defined as having a life expectancy of less than 12 months.)
• Accidental Death Benefit: Additional payout occurs if the insured's death is due to a qualifying accident.
• Accidental Death & Dismemberment: Payout is given if the insured dies or loses a limb or certain bodily functions due to an accident.

Selecting a Beneficiary for Your Death Benefit

The beneficiary indicates where the insurance benefit, or proceeds, will go after the insured passes away—usually a spouse, children, grandchildren or other family members. However, the death benefit doesn’t have to go to a person. A charity, religious institution, business or designated trust can also be named. Often, multiple people or places are listed as beneficiaries. Typically, life insurance avoids the probate process, going directly to the named beneficiaries. So, once you make your beneficiary selections, make sure you clearly communicate your wishes, share key policy details and explain how to make a claim. You’ll also want to select contingent beneficiaries, which are delegated beneficiaries if the primary beneficiary is no longer alive.

The Process to Receive a Life Insurance Payout

To receive a payout, a claim must be filed with the life insurance provider indicating how the beneficiary wants to receive their payments.

Before making a claim to receive a death benefit after an insured person has passed away, make sure the following requirements are met:

• You’re a designated beneficiary on the insurance policy.
• You know the insurance company name, contact information and policy number.
• You’ve obtained an official copy of the death certificate from the funeral home.

What Are the Most Common Payment Options?

Lump Sum Payments

A lump sum payment is exactly what it sounds like: beneficiaries receive the entire death benefit amount all at once. Of note: Permanent or whole life policies have a cash value benefit component that the policyholder may have borrowed against while they were alive. If they did not pay back the loan, the death benefit amount will be reduced by the outstanding loan amount.

Installment Payments

Some companies allow beneficiaries to elect to receive death benefit payments in installments, usually monthly or quarterly. This means you receive a fixed amount until the entire benefit is depleted. You can also choose to turn the death benefit into an annuity, allowing the money to earn interest, which can result in a higher overall payout when all is said and done.

Tax Implications for Beneficiaries

You may be wondering how life insurance payouts affect taxes. On the plus side, life insurance payouts are typically not taxable as income. Keep in mind that tax laws are complex and can change, so it’s always a good idea to consult with a tax advisor to discuss your specific situation.

How Long Does the Payout Process Take?

Timing to receive a payout can vary widely from case to case and from one insurance company to another. After a beneficiary files a claim, the insurance company will review it and respond in as little as 24 hours or up to 60 days. If you feel the wait’s longer than expected, don’t be afraid to reach out—an agent will be able to explain where your claim is and help expedite it. The claim process can’t be completed until all information is received, which differs from one claim to another.

The death of a loved one can be a sensitive topic. But the death benefit may bring some much-needed comfort and support to families dealing with a loss. Understanding how a death benefit works and other key life insurance terminology allows policyholders, and their beneficiaries, to plan for the future.

At Gerber Life, we can help you select a life insurance policy to give your loved ones the financial support they'll need when you're gone. Call us today at 1-866-503-4481 to speak with one of our dedicated representatives, or you can get a free quote online.