Death Benefit

A death benefit is a payment made to a named beneficiary from a life insurance policy, annuity, or pension when the insured person dies. It provides financial support for funeral costs, outstanding debts, and ongoing living expenses. Payments are typically a lump sum or installments and often bypass probate, enabling faster access to funds.

Key takeaways

A death benefit is paid to beneficiaries of life insurance, annuities, or pensions after the insured’s death.
Life insurance death benefits paid in a lump sum are generally not taxable as ordinary income.
If payments include interest (for installment distributions) or are received from an annuity, part of the proceeds may be taxable.
Death benefits named to the estate may be subject to federal or state estate tax if the estate exceeds exemption limits.
To receive a benefit, beneficiaries must identify the insurer and submit a completed claim form and a certified death certificate.

Types of death benefits

All-cause death benefit: Standard life insurance coverage that pays for most causes of death except those specifically excluded in the policy.
Accidental death benefit (ADB): A rider that pays an additional benefit if the insured dies as the result of a covered accident.
Accidental death and dismemberment (AD&D): A rider that pays for death from covered accidents and for specific catastrophic injuries (loss of limbs, vision, etc.).

How death benefits work

The policyholder selects the death benefit amount and pays premiums to keep the contract in force.
Beneficiaries can typically choose how they receive proceeds:
Lump-sum payment (most common)
Fixed periodic installments (monthly, quarterly)
Annuity payments that continue for life or a set period
Interest-only withdrawals while leaving principal to another beneficiary
Some insurers offer retained asset accounts that hold proceeds and allow the beneficiary to make withdrawals while earning interest.
When a beneficiary is named, proceeds usually pass outside probate. If no beneficiary is named, the insurer pays the estate, which can trigger probate.

Claiming a death benefit — step by step

Identify the insurer(s) holding the policy, annuity, or pension. The policyholder often shared this information with beneficiaries.
Contact the insurer to request the death claim form and instructions.
Complete the claim form, providing the insured’s policy/contract number, name, Social Security number, date of death, and payment preference.
Submit the completed claim form with a certified copy of the death certificate (insurers commonly require certification and cause of death).
If multiple beneficiaries are listed, each may need to complete separate claim forms.
Keep records of all correspondence and confirmations from the insurer.

Taxation and estate implications

Life insurance death benefits paid directly to a beneficiary are generally excluded from the beneficiary’s taxable income.
If the benefit is paid in installments that include interest, the interest portion is taxable as income.
Death benefits paid to an estate can increase the estate’s value for estate tax purposes and may be subject to federal or state estate taxes if the estate exceeds exemption limits.
Annuity death benefits: beneficiaries often must include received payments as income to the extent they represent earnings or untaxed interest; tax treatment depends on contract type and prior contributions.

If you think you’re a beneficiary

Ask the deceased or the executor whether you are named as a beneficiary rather than waiting for an insurer to notify you.
If you cannot locate policy information, use industry resources such as state insurance department services or national policy locator tools to search for policies.
Once identified, follow the insurer’s claim procedures and submit required documentation promptly.

Annuity-specific considerations

Annuities can allow a named beneficiary to continue receiving payments or to receive a lump sum of remaining contract value.
Beneficiaries typically report annuity income in a manner similar to how the deceased would have: earnings and untaxed portions may be taxable.
The exact tax treatment depends on the annuity contract, pre-tax contributions, and how distributions are structured.

Practical tips

Keep an up-to-date list of insurance policies, carrier contact information, and beneficiary designations in a secure but accessible place.
Review beneficiary designations after major life events (marriage, divorce, birth of a child).
Consult a financial advisor or tax professional when deciding between lump-sum and installment options or when dealing with estate-tax questions.

Conclusion

Death benefits provide important financial relief to survivors and are usually structured to avoid probate and ordinary income tax when paid as a lump sum. Because tax and distribution rules vary by contract type and how proceeds are paid, beneficiaries should promptly identify insurers, submit required documentation, and consider professional advice to make informed decisions.