the death benefit is an amount of money paid to your beneficiary after you pass away

SLS Explains: What’s a Death Benefit?

Death benefits are common across a variety of financial products but are major factors in life and burial insurance. When reviewing life insurance policies, it’s important to take into account the death benefit that’s available, and how much the policy costs because these two factors generally correlate. Keep reading to learn more!

Death Benefit Defined

A death benefit is an amount of money (typically cash) issued after a policyholder dies, and a claim is submitted requesting it. This is assuming the death occurs during the active policy and the death benefit is usually tax-exempt. Whole life insurance policies usually have a guaranteed death benefit because the policy will exist for the policyholder’s whole life or remaining years, as long as they pay the agreed-upon amount.  

Term policies are active for the agreed-upon term, so if the participant outlives the policy, the death benefit outlined in that particular policy would end with the contract.  

Burial insurance comes along with a smaller benefit, typically no more than $25,000.

Regardless of when or if the death benefit is issued, policyholders generally have control over how the funds are distributed or to whom they’re distributed. The issuance of the benefit is generally given to one or more persons or entities (e.g. charity, family trust, etc.) as defined within the policy, which are known as beneficiaries. As far as how the funds are distributed, people may choose to have the benefit distributed as lump sums, annuities, or installments.

Consider a Beneficiary

A beneficiary is typically a person or entity that will receive financial benefits from a standard life or burial insurance policy. If multiple people are chosen, the specific percentage would be predetermined by the policyholder. The designated beneficiaries are typically chosen when filing for the policy but can sometimes be determined or changed at a later date.  

In addition, insurers will typically allow a change in beneficiary as long as the proper paperwork is filled out. In terms of receiving the benefit, beneficiaries generally have to file a claim and show proof of death to request and receive the payments. The beneficiary can then use the funds for any final expenses, which are sometimes defined in the policyholder’s final wishes — but could be used for a variety of things like medical bills, ongoing care, etc.

For many, their families will be the ones who will carry out their final wishes once they have passed. If you choose to have beneficiaries, letting them know about your burial arrangements and the measures you’ve taken to make sure it’s all covered will make things so much easier, especially in a financial sense!

Remember, the beneficiary should be someone you can trust that will carry out your end-of-life wishes — by making sure your funeral costs are covered, as well as any medical bills that arose during your final moments. 

How Are Death Benefits Chosen or Determined?

Death Benefits are generally chosen and determined based upon the risk and necessity of the amount. How much is necessary and the risk of said amount generally correlates to how much money the policyholder makes, because when they die that income will cease to exist. In other words, the amount needed supplements the amount that will be lost.  

At the same time, the amount a person makes not only will provide an indication as to the amount of the death benefit that’s needed but how much they can afford to pay to ultimately be eligible for the benefit. Other factors that are taken into consideration are usually age and health, which can affect the risk factor for the company and their willingness to issue policies with higher premiums. Each company generally has its own formula that’s used to reach these determinations, so comparing companies should help in determining what policy might be best.

Key Takeaways

  • Policies for various types of insurance may offer a death benefit, but life insurance is based on death benefits, as this is the purpose they serve. 
  • The death benefits available through life insurance policies are generally significant amounts that are based on a variety of costs and risk factors as reviewed by the insurer. 
  • These predetermined benefits are given to the designated beneficiaries after they submit a claim once the policyholder passes.  

If you need more information about your burial insurance options and death benefits available, we may be able to help. Give us a call at 800-548-3249 if you need help making informed decisions about what options may be best for you.