A death benefit is a sum of money paid out to the beneficiary or beneficiaries of a life insurance policy, as long as the insured person died while the policy was in effect.
The death benefit is the primary purpose of buying life insurance coverage; it’s what your premium payments cover throughout the life of your policy.
Table of contents
- How do death benefits work?
- How to claim a life insurance death benefit
- Why might a life insurance claim be denied?
- Death benefit FAQs
- Summary of Money's guide to death benefits
How do death benefits work?
Life insurance pays out a tax-free death benefit if your policy is active when you die.
There are several different types of life insurance policies, but the main categories are term life insurance — the more affordable option — and permanent life insurance.
Here’s how death benefits work for these different types of life insurance policies.
Term Life Insurance
Term life insurance policies are in force for a set period or term, which typically range in length from 10 to 30 years. If the insured dies within the policy term, the insurer pays out a death benefit equal to the policy’s face value.
Permanent Life Insurance
Unlike term life insurance, permanent life insurance policies such as whole life insurance do not have an expiration date. Rather, they remain in force for as long as premiums are paid. If the insured dies while the policy is in force, the death benefit is paid out to the beneficiaries.
Lump-sum payments vs. annuitized payments
The most popular ways to cash out a death benefit are receiving it as either a lump-sum payment or as an annuity — typically an annual payment of a certain portion of the death benefit that’s agreed upon before the time of the payout.
Most beneficiaries choose the lump-sum payment and work with their financial planner or advisor to set up a financial plan.
|Lump-sum death benefit payment
|Annuitized death benefit payment
|The death benefit is paid out in full.
|The death benefit is invested in an annuity account, and the remaining death benefit earns interest over time as installments pay out.
|Choose direct deposit or check and receive your funds within 30-60 days after processing.
|Receive annual payments for a predetermined amount years — or over the beneficiary’s lifetime.
|The full death benefit is tax-free.
|Annuity gains from interest are taxable, so you may have to pay taxes on a portion of the installments.
What happens to the cash value component of whole life insurance after you die?
Whole life insurance and other permanent life policies feature a savings component called "cash value,'' which functions as a guaranteed investment with a slow growth rate and is funded by a portion of the premium.
The cash value can be paid to you while you’re alive, but only if you surrender the policy. You can also take loans from the cash value account, but if you don't repay them, the outstanding loan amount will be deducted from the death benefit.
After you die, the cash value will not be paid out to your life insurance beneficiaries. If you have a $1 million policy with $500 in the cash value, your beneficiaries would only receive $1 million upon your death. The cash value goes to the insurance company.
To get the permanent life policy to pay out both the cash value and the face amount, you could add an optional insurance rider that would increase your premiums further.
What is an accelerated death benefit?
The term accelerated death benefit refers to a policy provision or rider that allows the policyholder to access a portion of the death benefit while they’re still living. While specific requirements and qualifying conditions vary by insurer, you must generally be diagnosed with a terminal illness or serious chronic condition to trigger this benefit.
How to claim a life insurance death benefit
Once the life insurance policy owner dies, the designated beneficiary or beneficiaries can claim the death benefit. Life insurance companies typically take up to a month to review a claim before paying out the death benefit. They may request further documentation.
Documents required to file a life insurance claim
- Certified copy of the death certificate
- Life insurance policy document or policy number
- Completed claim form(s)
Steps to filing a life insurance claim
- Call the insurer with the policy number and the insured’s details.
- Complete and submit a life insurance claim form (some companies have an online process, while others send a letter).
- Attach a copy of the death certificate and other required documents.
- Allow five to seven for processing and approximately 30 to 60 days to receive the funds.
- Once the claim is submitted, determine how the proceeds will be distributed.
Why might a life insurance claim be denied?
According to the American Council for Life Insurers, less than 0.2% of life insurance claims were delayed or denied at the end of 2021. Although it is not common for claims to be denied, there’s a variety of reasons why your death claim might be rejected.
A lapsed policy
For a life insurance policy to pay out, the policy must be in force, meaning the policyholder was actively making payments to it. If they neglected to make payments and the grace period expired, the policy could lapse, and the death benefit claim could be denied.
Misleading or false statements on your life insurance application could lead to your beneficiaries' claim being denied. This includes providing incorrect information about your age or medical history or those of your parents.
Some life insurance policies have exclusions for fatalities caused by risky activities such as skydiving, scuba diving, piloting a plane and rock climbing. Suicides are also excluded from coverage for up to two years during what’s known as the policy’s contestability period.
If your life insurance claim is denied, hiring a life insurance lawyer could be your best bet to dispute it.
Death Benefit FAQ
How do beneficiary designations work?
Death benefits are paid out to the beneficiaries you named on your policy. Your life insurance beneficiaries can be one or more persons, a trust that is managed by a trustee, a charity or your estate.
You can set up primary beneficiaries and contingent beneficiaries. If you die, your primary beneficiaries are the first in succession to receive the death benefit. If your primary beneficiaries die before you, the death benefit will go to your secondary or contingent beneficiaries.
When can I change a beneficiary designation?
Beneficiary designations can be changed at any time, but you should update this information whenever you experience a life event such as a marriage or divorce. The death benefit will be paid out to the person or persons listed on the beneficiary designation, regardless of the instructions on your will.
Do you have to pay out-of-pocket for funeral expenses?
Most funeral homes request payment up-front, so your surviving family members will have to pay for the expense out of pocket. However, some life insurance companies will also offer an expedited payout for funeral expenses.
There’s also the option to pre-pay for your funeral expenses, so your heirs don’t have to come up with the money after you die.
What can I do if someone died but didn’t leave a copy of their life insurance policy?
If you believe you’re the beneficiary of a policy, you can take the following steps to find and obtain your benefits:
- Check your loved one’s bank and credit card statements for any payments made to insurance carriers.
- Contact any current or past financial advisors to see if one of them sold the deceased a policy.
- Contact the human resources department at their last workplace to see if they provided an employer-sponsored life insurance policy.
- Try to access the deceased person’s email account and search for any information on life insurance policies.
How quickly must you claim a death benefit?
There’s no time limit on filing a life insurance claim, so don’t worry about being late with your request for life insurance proceeds. That said, filing promptly after the insured’s death will of course speed up the payout process.
To file a claim, you should contact the insurance company or go online to start the claim process.
Can a policy owner claim a death benefit while alive?
If you have a policy with an accelerated death benefit provision, you could receive a portion of your life insurance death benefit while you're alive. Accelerated death benefits are available to those diagnosed with a terminal or chronic illness, but some policies require the policy owner to have a life expectancy of six months or less to collect on the provision.
Depending on the policy, some disabling illnesses may also qualify you to receive an accelerated death benefit. That amount could range between 50% and 80% of the value of the policy.
Summary of Money’s guide to death benefits
- A death benefit may be disbursed in a lump sum payment or monthly or annual annuity installments.
- Lump-sum payouts are tax-free, but annuity payments are partially taxed.
- To file a death benefits claim, you need a copy of the death certificate, the life insurance policy information and the claim form.
- Some causes of death, such as those from risky activities or suicide, may be excluded from coverage, at least for a certain period.