What is a death benefit?
A death benefit is a payment to the beneficiary of a life insurance policy, an annuity or a pension when the insured or the annuitant dies. For life insurance policies, death benefits are not subject to income tax and the named beneficiaries generally receive the death benefit as a lump sum payment.
The policyholder can structure how the insurer pays death benefits. For example, an policyholder can specify that the beneficiary receives half of the benefit immediately after death and the other half after the date of death. In addition, some insurers offer beneficiaries different payment options instead of receiving a lump sum. For example, some beneficiaries may choose to use the proceeds of their death benefit to open an ineligible retirement account or choose to pay the benefit in installments. Death benefits from retirement accounts are treated differently from life insurance policies. Death benefits from these accounts may be taxable.
Although not subject to income tax, life insurance death benefits may be subject to estate tax.
Understanding death benefits
Persons insured under a life insurance policy, a pension or another annuity product including a death benefit conclude a contract with a life insurance company or a financial services provider time of request. Under an insurance contract, a death or survivor benefit is guaranteed to be paid to the registered beneficiary, as long as the premiums are satisfied while the insured or the annuitant is alive. Beneficiaries have the option of receiving the death benefit proceeds either as a lump sum payment or as monthly or annual payments.
Beneficiaries of life insurance policies receive payment of the death benefit free of ordinary tax, while beneficiaries of annuities may pay income or capital gains tax on the death benefits received. In either case, the proceeds of life insurance or annuity death benefits avoid the often costly cumbersome process of probate, which ultimately results in timely payments to survivors. However, for most policies and accounts, if the policyholder does not name a beneficiary, the insurer pays the proceeds to the estate of the insured, who can be certified.
Key points to remember
- A death benefit is a payment to the beneficiary of a life insurance policy, an annuity or a pension when the insured or the annuitant dies.
- Beneficiaries must submit proof of death and proof of cover for the deceased to the insurer.
- Beneficiaries of life insurance policies receive payment of the death benefit free of ordinary tax, while beneficiaries of annuities may pay income or capital gains tax on the death benefits received.
Death benefit payment conditions
After the death of an insured person or annuitant, the process of receiving a death benefit from a life insurance policy, a pension or an annuity is simple.
Beneficiaries must first know which life insurance company holds the policy or annuity for the deceased. There is no national insurance database or other central location that hosts policy information. Instead, it is the responsibility of each insured to share policy or annuity information with beneficiaries. Once the insurance company has been identified, beneficiaries must fill out a death request form, providing the policy number of the insured, name, social security number and date of death, as well as preferences for payment for the death benefit proceeds.
Beneficiaries must submit death request forms to each insurance company with which the insured or the annuitant has taken out a policy, as well as a copy of the death certificate. Most insurers require a certified death certificate, listing the cause of death. If more than one beneficiary or survivor is on a policy or annuity, everyone must complete a death request form to receive the applicable death benefit.