Life Insurance Death Benefits Explained
A death benefit is a payment beneficiaries receive when the life insurance policy owner passes away.
When consumers buy a life insurance policy, they select the individual(s) they want to receive the death benefit upon their passing.
Essentially, the death benefit provides financial support for dependents who rely on the insurer’s income to support them financially.
Who Gets the Death Benefit?
The life insurance death benefit is paid out to your life insurance policy’s beneficiary or beneficiaries.
You can name more than one beneficiary on your policy and can even determine the exact percentage of the death benefit that each beneficiary receives; for example, 50% or 25%, etc.
Anyone who isn’t listed as the beneficiary on your policy cannot receive the death benefit — whether it be your spouse, partner, business partner, or a lender you owe a debt to; such as, a mortgage loan company.
How are Death Benefits Paid?
The death benefit is paid out as an income tax-free lump sum amount unless the beneficiary chooses to take the benefit as an annuity, or in installment payments (monthly, quarterly, annually).
There are a some life insurance policies where the insurance premium is paid with pre-tax dollars (for example, with some employee benefit plans); in that case, the death benefit may not be income tax-free.
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 their children.
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How are Life Insurance Death Benefits Paid?
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