A death benefit is a payment made to the beneficiary of a life insurance policy, annuity, or pension upon the death of the insured person or annuitant. Typically, these benefits are tax-free, providing financial security to the named beneficiaries.
What Is a Death Benefit?
A death benefit is a sum of money paid out to the beneficiary of a life insurance policy, annuity, or pension plan after the policyholder or annuitant passes away.
In the case of life insurance, the specific amount of the death benefit is predetermined in the policy and selected by the policyholder who makes regular premium payments. Premium amounts are contingent upon the chosen benefit amount, with lower premiums typically available to younger and healthier individuals.
Acquiring a life insurance policy with a death benefit can provide assurance that your loved ones will receive financial assistance in the event of your demise.
Types of Death Benefits
Death benefits from insurance policies encompass various categories, including all-cause death benefits, accidental death benefits (ADB), and accidental death and dismemberment benefits (ADDB). Let’s delve into the specifics of each type of death benefit below.
- All-cause death benefit: This type covers deaths from all causes except those explicitly excluded in the policy terms.
- Accidental death benefits (ADB): Typically included as a rider to an insurance policy, ADB is paid out for deaths resulting from accidents.
- Accidental death and dismemberment benefits (ADDB): ADDB is an additional coverage often attached to life insurance, providing benefits for accidents resulting in death or bodily injury.
How Death Benefits Work
Upon the insured’s demise, the designated beneficiary is entitled to receive the death benefit stipulated in the contract, given that premiums were consistently paid.
Typically, life insurance death benefits are disbursed in a lump sum. Alternatively, beneficiaries may opt for installment payments, annuities, or interest-only payouts.
Some policies even offer a retained asset account option, where the insurer acts as a custodian for the proceeds, allowing beneficiaries to make withdrawals as needed.
To claim a death benefit, beneficiaries commonly need to submit a completed claim form, along with the necessary documentation such as the contract copies and a death certificate.
The avoidance of probate often expedites the distribution of proceeds from life insurance or annuity death benefits, providing swifter access to the intended recipients.
Taxation
Death benefits received from life insurance policies typically evade ordinary income tax, although annuity beneficiaries may face tax obligations. Pensions’ benefits, on the other hand, might be subject to distinct tax treatment.
While lump sum life insurance death benefits are usually tax-exempt, interest-bearing installments could be taxable. In instances where the benefit is directed to the estate, there might be estate tax implications.
Requirements for Payout of Death Benefits
Claiming a death benefit from a life insurance policy or annuity typically involves straightforward procedures.
Beneficiaries must first identify the insurance company holding the policy or annuity and then complete a death claim form with essential information like policy details, the deceased’s particulars, and payment preferences.
Submission of the death claim form, accompanied by a copy of the death certificate to the relevant insurance companies, is typically required from each beneficiary listed on the policy.
The Bottom Line
Death benefits are instrumental in providing financial aid to beneficiaries post the insured individual’s demise, assisting in covering funeral expenses and essential living costs. Consulting a financial advisor when naming beneficiaries or inheriting such benefits can offer valuable guidance tailored to your circumstances.