Anyone who purchases a life insurance policy does so for the death benefit. The average payout for the death benefit in the US is $160,000 – $170,000. What determines the amount of death benefit your beneficiaries receive depends on the type of policy you buy.
After the death of a loved one, it is common for people to lose their bearings. This is especially true when the deceased was the breadwinner of the family.
Life insurance provides income for the bereaved to find their feet and plan for their life without the deceased in it.
However, the process of filing a claim is a stressful one, and without the right knowledge, it can drag longer than necessary.
What Is A Death Benefit?
A death benefit is a money an insurance company pays the policy’s beneficiaries when the policyholder passes away. The beneficiaries of a policy are the people you want to receive your money when you die.
Typically, beneficiaries are spouses, children, and relatives. What your beneficiaries do with the money upon receipt isn’t the company’s concern. It is their money, and they can spend it how they deem fit.
It is natural for beneficiaries to set aside a part of their death benefit for funeral expenses and perhaps repayment of debts when they die. Then, you can use the rest of the money for whatever the beneficiary deems necessary- donations, investments, or even vacation.
How Is The Money Paid Out
Fortunately, you are free to choose how you want to receive the money. There are several options for receiving a death benefit payout:
The insurance company deposits the money into an investment account with this payout option. The beneficiaries will receive a portion of the money alongside the accumulated interest until the money runs out.
Retained Assets Account
This payment method is a mix of annuity and lump sum. The full amount is paid into an account that earns interest. What makes the retained assets account unique is that it gives the beneficiary the option of earning interest while retaining access to the full amount of money.
This is the most common payment option for receiving death benefit payments; it is so common that some people use it to define a death benefit.
The full benefit is paid out in a single payment as a lump sum in this payment method. You can either request a check or have the money wired directly to your bank account.
Installments work the same way as annuities; the major difference is that installments are not paid from an investment account.
With this type of payment method, the death benefit is received as a fixed amount over a period until the money is exhausted.
Factors That Could Affect Death Benefit
There are instances where an insurance company will deny a claim. There are two major reasons why this may happen.
False Information/ Withhold Information
Suppose the policyholder stated that they are 80 years old when registering with the company when older or younger. Or they failed to mention chronic diseases they are suffering from, like diabetes. In such situations, the company has the right to deny your claim.
Another reason insurance companies deny a claim is if the policyholder missed payments before their death. However, most companies will allow you to claim a portion of the death benefit. This amount will be the total value of the policy minus the total amount of missed premiums.
Cause Of Death
Most companies will deny your beneficiaries their death benefit if you die under certain circumstances. The most common example is suicide.
Another example is if you die while engaging in illegal activities or life-endangering activities like sky diving and bungee jumping.
The table below contains life/annuity insurance benefits and claims between 2018 and 2020.
|Matured endowments, excluding annual pure endowments||381,587||423,780||467,154|
|Disability, accident and health benefits (1)||131,440,728||140,558,797||137,585,722|
|Coupons, pure endowment and similar benefits||11,216||4,327||4,297|
|Surrender benefits, withdrawals for life contracts||350,278,913||339,640,132||323,350,563|
|Interest and adjustments on deposit type contracts||9,539,457||10,044,578||9,815,812|
|Payments on supplementary contracts with life contingencies||2,152,431||2,413,542||2,414,306|
|Increase in aggregate reserve||133,760,428||110,529,379||100,020,756|
Frequently Asked Questions
What Is The Death Benefit In Insurance?
This is the amount an insurer pays to the beneficiaries of a life assurance policy when the insured passes away. Most people will ask to be paid their death benefit as a lump sum; this is why some people define death benefits as a lump sum of money.
How Do You Collect Death Benefits?
If you are a listed beneficiary on a life insurance policy and the insured is deceased, you can go to their insurance company to file a claim and receive their death benefit.
How Long Does Payout On A Claim Take?
You can’t expect to receive the money to be paid immediately after filing your claim. On average, the payout time on death benefits can range from a week to two months. The time is dependent on how quickly the insurance company can approve your claim.
They will have to verify the policyholder’s death, beneficiary information, and other matters within this time.
What Is The Value Of My Death Benefit?
You would not likely know how much to expect from your loved one’s death benefit. However, you can look at the insurance documents to see how much the policy is worth.
We would also advise that you contact the insurance company to tell you how much you will receive in death benefits on the policy.
Are Death Benefits Liable To Tax?
Generally speaking, no, they are not. Death benefits are tax-free. However, if your death benefit is being paid from an investment account, you will pay taxes on the interest earned on that account.
A death benefit is the best thing to leave for your loved ones once you have passed away, especially when you are the family’s sole provider. With it, they can lay you to rest in a befitting way and still trudge through life in your absence.
Our honest advice is to purchase a life policy plan of good value and ensure that all the beneficiaries are aware of it. This way, they won’t miss out on their death benefit due to ignorance.
The company may not always reach the beneficiaries when nobody comes to claim. This is due to having outdated or wrong information in their database.
What is the Average Payout Time