What is Death Benefit in Life Insurance?

When someone files a claim for life insurance, they are paid the death benefit amount by their insurance company. The recipient of the contract receives this amount. The insured person chooses the recipient before his/her death.

Death benefit provides a source of income for the family or relatives of a deceased person who was financially dependent on him/her.

However, if the insured person has not nominated anyone to claim the death benefit or the receiver is not alive, then the entire amount goes to the estate of the departed person.

Face Amount vs Death Benefit

Keep in mind that face amount and paid death benefits are similar. The initial amount of money claimed by the beneficiaries on account of the death of the insured person that is mentioned in the contract is the actual face amount.

During the underwriting process, the underwriting department evaluates the future risks, based on the face amount that the insured person is applying for.

Various reasons may contribute to the increase in or reduction of the face amount and death benefit. However, it is more difficult to increase the amount significantly in most cases. It usually decreases.

The reasons for the change in face amount may vary from case to case. It can be due to an additional amount paid to acquire insurance with dividends or money saved on insurance cost in order to increase the cash value of death benefit.

When Are Death Benefits Received?

Usually, the amount of death benefit is received on the confirmation and valid death news of the insured person.

To receive it, the named beneficiaries have to submit a valid claim with the original cause of death.

Note that a valid claim along with the original death certificate of the deceased person and all the paperwork should be filed.

As soon as you file all the paperwork with a valid claim, the company will start making timely payments to the named recipients in the contract as stated in the relevant law.

It is hard to state the time needed to process a claim of the death benefit. This is because it varies from one country and company to another.

That being said, the estimated time may vary from one to two months. In some cases, these claims are paid quicker than usual.

Death Benefit And Taxation

If you plan for your insurance smartly, the recipient of the death benefit can go tax-free. This means that with the proceeds of the insurance money the insured person can transfer the money to their heirs without paying any additional taxes. This is why planning is important.

However, in a few situations to qualify for a tax-free claim on the death benefit, there are some prerequisites regarding policy ownership before and at the time of the death of the policy owner that you have to consider. Funeral expenses are tax-free, read this.

Generally, to claim a nontaxable amount of money, the policy should be owned by someone other than the insured owner for a period of at least three years before the death of the insured owner. Furthermore, you have to keep the ownership in a trust to avoid taxes.

Purpose Of Death Benefits

The most important purpose of death benefits is to provide money to cover the dependents of the departed person by providing them financial assistance. Only a few people are aware of the uses of death benefit apart from the purpose stated above.

After the death of the insured individual, the death benefit will offer multiple benefits other than a decent stream of income for the loved ones of the departed person.

Here are some of these important benefits

Payment Of Estate Taxes

After the death of a person, their estate and assets are passed onto the heirs. If there is a huge amount in possessions left behind, it is likely that there will be a huge amount of taxes payable on these items.

Keep in mind that some assets are not liquid, such as property or pieces of artwork. Despite that, the IRS charges hefty taxes on the value of these goods.

Until and unless the heirs of the deceased person sell the items, they won’t owe any tax to the state. But they need to pay estate taxes. To do so the heirs may have to sell some sentimental belongings. And in some cases, they may have to giveaway valuable items on the discounted price to liquidate them.

The death benefit allows the heirs to inherit the non-liquidated assets, such as property without selling it. It also helps in avoiding disputes if the deceased person had named more than one recipient as the owner of their possessions.

Note that one person may have the money to pay the taxes while the other may not. It is why disputes about selling the property may arise.

The death benefit helps liquidate the assets by providing funds to pay taxes. It helps in the smooth transfer of assets from the departed person to their nominated heirs without selling the valuable or sentimental assets or burdening the beneficiary with tax responsibilities.

Key Man For A Company

A successful business depends on the diligent work and efforts of the person who launched it and the people who work there.

But, the death of one important member of the company may jeopardize the business in the future. The replacement of that individual may cost the company in terms of lost opportunities.

To resolve this issue of a key member and avoid the financial burden on the company, it is acceptable in a company to have key man insurance for the owner or another important member.

This practice is really common among two or more business partners. To ease the monetary burden on the business and cover the due taxes arising from the transfer of ownership, they get key man insurance to secure the business.

Don’t Pay Taxes For Funding A Trust Or Transferring Liquidated Possessions To Your Heirs

Commonly you don’t have to pay taxes on death benefits. This is especially true if the possessions are present in the form of liquidated cash.

In this case, the transfer of assets will be in cash to the heirs of the deceased person and also there won’t be any tax due on it.

Similarly, if that cash is invested in other policies, such as modified whole life insurance, then you won’t have to pay any tax when you receive your invested money. There is also a possibility that you may get bonus money. For example, the age of the person at the time of death can determine whether or not you will get that additional amount.

The tax-free money and possessions make insurance policies very tempting and pleasing. Yet, there are some prerequisites to receiving tax-free ownership rights to the insured possession of the departed person. To avoid tax issues in the future, an experienced and certified tax official can help you considerably.

The Needed Death Benefits

Every person has a different lifestyle and different income. Likewise, everyone needs customized financial planning to have a secured future. It is advisable to consult an experienced and qualified financial planner to decide what specific things you need from the death benefit.

This will ensure that when you pass away it will not bring a financial burden on your family members and loved ones.

When you meet a financial planning expert, here is a simple trick that you can use to secure the future of your dependents in case of your untimely death.

Here is a very easy and uncomplicated calculation that will give you an estimate of what will be left for your loved ones, once you leave the world.

First, consider the income of the person who is planning to get insured. Now, calculate the entire amount of their income till the date of their planned retirement. Then calculate the cost of a burial ceremony and mourning (it will be an estimate). Now, you have to add both these costs.

You will get an estimate of what would be the loss in income if the person who is planning to get insurance dies today.

This will help you make smarter and better decisions for the sake of your family and will also ensure a secured future for your family even if your journey in this transitory world comes to an end. You’ll be able to rest in peace. For more details, read this ultimate guide.

The Actual Purpose Of Life Insurance Is A Death Benefit

In recent years, many insurance companies have emerged and have become life saviors for many families. Getting life insurance is one way to save and invest your money; also, when you get your savings back, you don’t have to pay taxes, which is great.

However, the main goal of these insurance companies is to provide death benefits to the loved ones of the deceased person. These death benefits are already decided at the time of signing of the contract, and there are no changes until the policy is validated.

Linda Chavez

I'm a burial & senior life insurance expert, independent agent, Founder & CEO of Seniors Life Insurance Finder. I have been working in this sector since 2004 and established my own company in 2014. I have a team of seven members, and we are trying hard to share the knowledge we've gathered. We know how difficult often it is to find an affordable policy. Hence, we are doing our best to help you.