What is a death benefit?

In a life insurance policy, the death benefit is the payout your beneficiaries receive from your life insurance policy when you pass away. It's also the reason most people take out a life insurance policy in the first place. The amount is typically set when you purchase the policy, and it’s meant to help cover expenses such as funeral costs, debt or even future living costs for your family.

How do death benefits work?

Once the insured person passes away, the policy beneficiaries must file a claim with the insurance company, providing proof of death, usually in the form of a death certificate. The insurer then processes this claim, and once it’s approved, they issue the payout. This process is designed to be simple so that the family gets the financial support they need without the added stress.

How to calculate a life insurance death benefit

Calculating the right death benefit involves thinking about what your loved ones will need to maintain their lifestyle and cover necessary expenses without your income. A common guideline is to multiply your annual income by 10. But don’t forget to factor in other important considerations — for example, outstanding debts, future education costs for your kids and even funeral expenses. The exact amount will depend on your unique situation and financial goals.

Let’s review a hypothetical example

Emily is a 40-year-old woman, married with 2 children and earns $50,000 a year. She wants to make sure her family can keep their lifestyle if she’s not around anymore. Following the method of multiplying annual income by 10, she might aim for a death benefit of $500,000. If she has no substantial debts but wants to provide for her children’s college education, that amount could increase.

Use our life insurance coverage calculator to find the amount of coverage that best suits your situation.

How are death benefits taxed?

In most cases, life insurance death benefits aren’t subject to income tax when paid as a lump sum. However, there are exceptions. For instance, if the benefit is paid in installments instead of a lump sum, any interest earned on those payments could be taxable. Also, if the policyholder’s estate is large enough to face federal estate taxes, the death benefit might be included in the taxable estate, which could impact taxation.

Having a better understanding about death benefits can help you to make informed decisions about your life insurance policy and help ensure that your loved ones are taken care of in the future.