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Understand how life insurance works

What Is a Life Insurance Death Benefit?

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The purpose of life insurance is to help protect your loved ones from financial burdens upon your death. If you’re covered under a life insurance policy when you die, the insurance company pays your beneficiaries (the survivors you designate in your policy) a sum of money called a life insurance death benefit.

There are two common types of life insurance, each suited for different stages of life or levels of risk tolerance.

  • Term life insurance is purchased to provide coverage for a specific period of time. This type of coverage may be used in the event of your death to help cover needs like paying mortgage payments or other debts, providing an emergency fund, or helping pay for a child’s education.
  • Permanent life insurance, such as a whole life insurance policy, provides protection that lasts a lifetime or for the life of the policy. It may be used to help cover long-term needs, such as paying for final expenses and other debts, or providing financial support for your family. Whole life can be a popular policy for those whose primary concern is covering funeral costs.

The death benefit is the main purpose of a life insurance policy; it’s essentially what you’re paying for when you sign up for life insurance coverage.

Generally, a life insurance death benefit received through a life insurance policy is not subject to income tax, and the named beneficiaries ordinarily receive the death benefits paid out in a lump-sum payment.

Beneficiaries can spend the life insurance death benefit however they choose; there are no restrictions.

How are life insurance death benefits paid out?

Beneficiaries must first file a death claim with the insurance company by submitting a certified copy of the death certificate. Most states allow up to 30 days for the review of the claim, after which the insurer either pays it out, denies it, or asks for additional information. If an insurer denies a claim to a life insurance death benefit, it will typically provide a reason. While there is no mandated time frame, some insurance companies can pay out life insurance death benefits in as little as 24 hours for whole life insurance, and 30 to 60 days for a term life insurance policy.
Learn more about the basics of life insurance.


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DISCLOSURES
Consult with a professional tax and/or legal advisor before taking any action that may have tax or legal consequences.