How are Death Benefits Paid?

The death benefit from a life insurance policy is most commonly paid out as an income tax-free lump sum, unless the beneficiary of your policy chooses to take the benefit as an annuity, or in installment payments. 

Remember, the policy owner (policyholder) selects who is the beneficiary of the policy.

There are a some life insurance policies where the premium is paid with pre-tax dollars (for example, with some employee benefit plans); in that case, the death benefit from the insurance policy may not be free from federal income tax. 

A death benefit can also be split: the policyholder can designate more than one beneficiary, for example, by dividing the benefit equally (or not) between the insured’s children.

Example: A married person with 2 children.

• Spouse: Receives 50% of the death benefit.
• Children: Each receive 25% of the death benefit.

 

How are Death Benefits Paid?