How does a death benefit work?

When considering your death benefit, it’s essential to plan how you want it utilized. This can include paying either in a lump sum or in multiple installments. The death benefit amount can also vary depending on whether you purchase term life or whole life insurance. The choice of how to customize and change the death benefit is the contract owner’s prerogative.

While researching death benefits, enter your ZIP code to discover what you could pay for a policy with an adequate death benefit today.

What is a death benefit?

A death benefit is a lump sum payment provided to a beneficiary when the insured person dies. Death benefits can vary widely and are often customizable depending on your budget. And there’s usually no limit as to what you can spend the death benefit on.

However, you can designate how the death benefit pays out, usually as a lump sum or in installments. The insurance company could even pay these payments in periods that simulate any lost income, allowing for a transition after losing the primary income earner in the house. If you know how you want the death benefit to be spent, establishing installments may help.

While spending the death benefit is virtually limitless, some choices make more sense. If you are planning your death benefit, consider how it can be spent on the following:

• Monthly income to replace what is lost
• Medical debt or student loans
• Paying off a mortgage or car payments

While a death benefit can serve as income to transition into a new period of life, it can also help eliminate your debt and alleviate some stress. If you have a specific idea of how you want the death benefit expended, consider discussing it with your beneficiary.

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What’s required for a death benefit to be paid out?

Death benefits can be very high, depending on the policy, even into the millions of dollars, meaning that an insurance company won’t be eager to part with them. You’ll need to be able to prove that the insured person has died in order to receive the death benefit. Proof of death is usually provided via a death certificate signed by a medical professional.

There are other scenarios when you might have to prove someone legally deceased, even if they only went missing. For example, you typically have to wait seven years before courts declare someone lawfully dead. While this will take longer, you’ll be able to receive the death benefit when the process is complete.

Do I have to pay taxes on a death benefit?

You don’t have to pay taxes on a death benefit in most cases. However, that doesn’t mean that you won’t have to pay taxes on the policy’s proceeds. For example, some life insurance policies accrue additional wealth and tax the accrued interest over time.

Whole life insurance, for example, pays a portion of the premiums into a savings account referred to as cash value. The cash value is sometimes invested at a small percentage over the years. When the insured person dies, that cash value will be taxed and added to the death benefit. To cover this, the whole life insurance cost is often more.

What are the different types of life insurance death benefits?

Multiple life insurance policies differ in value and coverage length. The death benefits can also vary in amount, depending on the length of the policy. According to the Insurance Information Institute, while policies are often dissimilar, term and permanent life insurance are the main types.

What is permanent life insurance? A permanent life insurance policy lasts for your entire life, as long you pay your premiums. On the other hand, term life insurance lasts for a specific period in your life and is often less expensive because of it. As a result, term life is often regarded as one of the most straightforward and affordable types of life insurance.

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What’s the difference between term and permanent life insurance death benefits?

Term and permanent life insurance death benefits can vary depending on the type of permanent life insurance. Term life will generally pay out the agreed upon amount only unless you have riders that add extra.

Permanent life insurance is an umbrella term for a couple types of policies that will last for your entire life. Whole, universal, and variable life insurance are all policies that will last a lifetime, but each approaches the death benefit differently.

The death benefits from permanent life insurance policies are often comprised of these types of coverage:

• Whole life – As mentioned, it accrues a portion of the premiums as cash value that is taxed and then added to the death benefit.
• Universal life – This policy has an invested cash value component, allowing it to take losses and grow.
• Variable life – The cash value component is invested in multiple accounts like a mutual fund, permitting it to take losses and receive gains.

Death benefits can vary and increase with these different life insurance policies. Generally, it’s the contract owner’s decision to determine what policy to obtain and maintain. For instance, most permanent life insurance policies allow you to take loans against the cash value but withdraw any outstanding amounts from the death benefit.

What can cause the death benefit to increase?

There are multiple ways that a death benefit can increase over time with investments or additional riders. One of the most used riders is for accidental life insurance.

What is accidental death insurance? This rider would apply an extra death benefit to your life insurance if the insured person died from an accident. The beneficiary would receive the agreed upon amount plus the accidental death benefit.

What are examples of popular life insurance riders?

Accidental death isn’t the only life insurance rider that customers frequently acquire. Many other life insurance riders can affect your death benefit at an extra cost. These are some of the most popular riders that accompany death insurance:

• Family income – Allows the death benefit to be paid out in increments, rather than simultaneously, to simulate income.
• Accelerated death benefit – If diagnosed with a terminal illness, this policy allows you early access to a portion of the death benefit to cover expenses.
• Return of premium – You’ll pay extra for this rider, but the extra amount is awarded to your beneficiaries upon your death.

The rider options will differ greatly among insurance companies, causing possible insurer alternatives to change. That being said, many of these riders are offered by the best insurance companies.

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Case Studies: Death Benefits in Life Insurance Policies

Case Study 1: John’s Term Life Insurance Policy

John, a 40-year-old individual, purchased a term life insurance policy with a death benefit of $500,000 for a duration of 20 years. He chose a term policy because it offered affordable premiums and coverage that aligns with his financial goals. In the event of John’s death during the policy term, his beneficiary will receive the full death benefit of $500,000. This illustrates how term life insurance can provide a substantial death benefit at an affordable cost.

Case Study 2: Sarah’s Whole Life Insurance Policy

Sarah, a 35-year-old individual, opted for a whole life insurance policy to provide lifelong coverage and a guaranteed death benefit. She purchased a policy with a death benefit of $1 million and built-in cash value accumulation. The death benefit will be paid out to Sarah’s beneficiary upon her passing, ensuring financial protection for her loved ones. Additionally, the cash value of the policy can be accessed during her lifetime for various financial needs. This showcases the benefits of whole life insurance, including a permanent death benefit and potential cash value growth.

Case Study 3: Mark’s Customized Death Benefit

Mark, a 55-year-old individual, decided to customize his life insurance policy to meet his specific needs. He purchased a universal life insurance policy with a flexible death benefit. The policy allowed Mark to increase or decrease the death benefit over time, depending on his changing circumstances. Mark initially chose a death benefit of $750,000 but had the option to adjust it in the future. This demonstrates the flexibility and customization options available with certain life insurance policies.

Death Benefits: The Bottom Line

A death benefit is a wonderful tool that you can use to ensure that your loved ones are taken care of after you pass. It can be indemnified in a lump sum — or in multiple installments — and can accrue additional wealth over time. Your death benefit insurance will ensure that you can rest easy with your family’s financial security sustained.

Now that you’ve learned about death benefits, enter your ZIP code into our free quote tool to determine what you could pay for a policy today.

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