The death benefit is the amount of money paid to the named beneficiary (or beneficiaries) when the insured person passes away. It is the core purpose of a life insurance policy and the primary reason people purchase coverage. The death benefit amount, also called the face value or face amount, is specified in the policy and can range from a few thousand dollars (in final expense policies) to millions of dollars, depending on the type of coverage and the insured's qualifications.
Death benefits are generally paid to beneficiaries income tax-free under current federal tax law. This tax advantage is one of the most significant benefits of life insurance, as it means the full death benefit amount is available to beneficiaries without being reduced by income taxes. However, if the policy is owned by the insured and the estate exceeds federal estate tax thresholds, the death benefit may be included in the taxable estate for estate tax purposes.
The death benefit can be paid as a lump sum, as installment payments, or as an annuity, depending on the beneficiary's preference and the carrier's options. Most beneficiaries choose the lump sum option. The claims process typically requires submitting a death certificate and a completed claim form to the insurance carrier. Most carriers process claims within 30 to 60 days, though the two-year contestability period allows carriers to investigate claims for material misrepresentation on the application.
Certain policy features can affect the death benefit amount. Outstanding policy loans reduce the death benefit by the loan balance. Accelerated death benefit riders allow a portion to be accessed while the insured is living. Some policies offer increasing death benefit options that grow the benefit over time. Guarantees related to the death benefit are backed by the financial strength and claims-paying ability of the issuing insurance carrier.