What Is the Life Insurance Death Benefit?
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What are life insurance death benefits?
A life insurance death benefit is the payout your loved ones receive if you die while your policy is in effect. For many people, the financial protection the death benefit offers is the main reason for buying life insurance.
If you have term life insurance, your beneficiaries will get the death benefit if you die during the term — which may be 1 to 40 years, depending on how long your policy lasts. If you outlive your policy, your loved ones won’t get any money.
The funds your beneficiaries will receive are typically tied to your life insurance face amount. Let’s say you have a $500,000 term life policy. If you die while the policy is active, the payout will be $500,000.
For permanent life insurance, which usually lasts your entire life, that final amount will be adjusted by any outstanding loans or withdrawals you made against your policy’s cash value. To use the same $500,000 policy example, if you borrowed $50,000 from your cash value and died before paying it back, your beneficiaries would get $450,000.
» MORE: Cash value life insurance
The death benefit amount is also one factor that affects your life insurance rates, along with your age, health and how long the coverage lasts. Put simply, a policy with a $250,000 death benefit will likely cost less than one with a $500,000 or $1 million death benefit.
How does the life insurance death benefit work?
When you buy a policy, you’ll name a life insurance beneficiary. This can be a person or an entity, like a trust or charitable organization. You can also name more than one beneficiary and decide how to allocate the money between them.
To get the death benefit, your beneficiary will file a life insurance claim with the company that issued your policy. This usually involves filling out a claims form and providing supporting documents, such as a certified copy of the death certificate. The death benefit typically avoids probate and is paid out to the beneficiary shortly after the insurer approves the claim.
Death benefits are usually paid in a lump sum, though some insurers offer to pay the money in annuities. Beneficiaries can spend the life insurance payout however they like.
If you’re not sure how much life insurance you need, use our life insurance calculator. This will help you crunch the numbers, including how much income your loved ones would need to replace if you died, any financial obligations you may leave behind (like a mortgage) and final expenses you’d like to cover, such as funeral and burial costs.
Learn more about life insurance basics
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