What Is a Death Benefit?

A death benefit is the amount the insured’s beneficiary receives after the insured’s death. The beneficiary can receive the death benefit in installments or a lump sum after a completed death claim, which requires a completed request for benefits form and a certified copy of the death certificate. A death benefit claim could be denied if the insured lied on the application or their cause of death was excluded from the policy.

There are a few types of death benefits, which determine if and how your beneficiary receives payment. Here are the most common death benefits:

• All Cause Death Benefit: Standard life insurance policies typically offer an all cause death benefit. This means the policy will pay your beneficiary when you die, regardless of the cause, unless the cause is for a reason expressly excluded in the policy.
• Accidental Death Benefit (ADB): A policy with an accidental death benefit will only pay out if the insured dies accidentally. Drownings, injuries, unintentional falls and car accidents are common accidental deaths, though qualifying causes can vary by the insurance company.
• Accidental Death and Dismemberment (AD&D): Accidental death and dismemberment policies will pay out only for a qualifying dismemberment or unintentional fatality. Qualifying examples include loss of fingers, sight, speech, hearing, movement or life due to an accident.
• Graded Death Benefit: Some life insurance policies, like guaranteed issue whole life insurance or final expense insurance, have a graded death benefit. If you die within the first two or three years of a graded death benefit policy, your beneficiary will only receive the premiums paid plus interest unless it’s an accidental death. An all-cause death benefit replaces the graded death benefit after the waiting period.

A life insurance policy's insured persons and beneficiaries must meet specific criteria to receive a life insurance payout. The insured’s responsibilities include meeting age, medical and residency requirements, making on-time payments and being truthful on the application. Beneficiaries must have valid ID and legal status, submit completed claim forms and not be involved in the insured’s death.

The beneficiary must submit a life insurance claim to receive life insurance proceeds. Here are the steps to take as the beneficiary:

It’s important to read the fine print of a life insurance policy to see if any exclusions or limitations could affect survivors benefits being paid out. Some exclusions and limitations include:

• Contestability Period: Life insurance companies typically have a period of contestability clause in the policy. If the insured dies within the first one to three years of the policy, the insurance company can investigate before paying out the claim. It can deny the claim if any misrepresentations are found in the application or something that falls under a policy exclusion.
• Alcohol or Drug Exclusion: Some insurers may deny a claim if the insured was under the influence of alcohol or drugs at the time of death or if alcohol or drug abuse caused their death.
• Suicide Clause: All life insurance policies come with a suicide exclusion. If the insured dies by suicide within the first two years of the policy, the insurance company will not pay out the death benefit.
• Inherently Dangerous Activity Exclusion: An avocation exclusion means the insurer won’t pay the death benefit claim if the insured dies due to a risky hobby or occupation, such as piloting a plane, mountain climbing, scuba diving or base jumping.
• Acts of War and Military Exclusion: Life insurance policies may also have an exclusion for deaths that occur due to acts of war or service in the military.
• Illegal Activity: A life insurance company may deny a death benefit claim if the insured died while participating in illegal activities, like driving while under the influence or dealing drugs.

A lump-sum payment is the most common way a death benefit is paid, but there are also other payout options available:

• Lump Sum: To receive a lump sum means to get the full death benefit amount all at once. The insurance company will send a check or direct deposit into the bank of the beneficiary’s choice for the policy’s face value.
• Annuities: Another option is an annuity payout, where the beneficiary receives installment payments for the rest of their life. The amount of money the beneficiary receives each month depends on their age at the time of claim. The insurer keeps any remaining money if the beneficiary dies before total disbursement.
• Specified income payout: Similar to an annuity, the beneficiary can request a specific installment schedule from the life insurance company. For example, if the death benefit is $250,000, you can request $25,000 annually for 10 years. The insurer typically holds funds in an interest-bearing account, with interest being taxable income to the beneficiary.
• Retained Asset Accounts: The life insurance company manages and invests the death benefit into a retained asset account with this payout option. The beneficiary can withdraw some or all of the funds whenever they want. Any interest earned is taxable.

Beneficiaries should be aware of potential tax implications on death benefit proceeds. The death benefit is usually not taxable income for federal taxes. However, interest earned on retained asset accounts or installment payments is taxable.

If a life insurance payout causes the estate value to exceed federal or state thresholds, the beneficiary could owe estate taxes. The following states have estate taxes:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Several states also have inheritance taxes, which could cause tax implications. Those states include:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Maryland has both estate and inheritance taxes. Estate taxes are paid before asset distribution, while inheritance taxes are paid based on asset value.

• Guide to Life Insurance Death Benefits and Final Expenses — This guide provides an actionable timeline for navigating final expenses and life insurance benefit payouts when a loved one passes, including special circumstances for military families.
• Accelerated Death Benefit Rider — Learn more about accelerated death benefit (ABD) riders, which allow beneficiaries to tap into portions of a death benefit, while the insured is still alive, usually to cover medical and end-of-life costs in cases of terminal illness.
• Getting a Life Insurance Payout Timeline —Discover tips for avoiding delays to receive timely life insurance benefit payouts.