The death benefit is the amount an insurance company promises to pay out, generally tax-free, when the life insurance policyholder dies.
What's a death benefit?
It’s the payout that your designated beneficiaries would get upon your death, if you have a life insurance policy.
A life insurance policy is a contract between a life insurance company and the policyholder, with the policyholder making the payments when they come due and the insurer, in return, pledging to pay the chosen recipient (the ‘beneficiary,’ as the life insurance company calls them) a given amount when the policyholder dies.
This payout is called the death benefit, and the death benefit corresponds to the coverage amount: a $50,000 policy pays a death benefit of $50,000, and a $1 million policy pays $1 million. The beneficiary generally pays no income tax on the death benefit, which is usually paid in a lump sum.
In the case of a term life insurance policy, which covers a certain period of time, the death benefit is paid only if you pass away while you are covered by the policy; if you outlive the policy, the insurer doesn’t pay anything. Under a whole life insurance policy, which is a type of permanent life insurance and covers you for your whole life, the insurance company would essentially guarantee to pay the death benefit whenever you die.
Who can I choose to receive my death benefit?
The person who receives the payout when you pass away can be almost anyone. You can name loved ones, like your child or spouse. (Keep in mind that if you want to provide financial support to your children, if they are still minors at the time of your passing, they will need a guardian to manage the funds, which can go into a trust.) Some people who are leaving a substantial inheritance may use the insurance proceeds to cover estate tax. A financial planner can help to arrange the details.
Beneficiaries don’t have to be immediate family members, though. You can name a domestic partner, fiance, ex-spouse, sibling, parent, grandparent, or business partner as a beneficiary, for example. They just to have what’s called ‘insurable interest,’ meaning that they’d be negatively affected in a financial sense if you were to pass. They don’t even have to be people—you can name a charitable organization or your own business as the beneficiary.
We know that you love your pets (and we sell insurance to help take care of them, too!), and, yes, some insurers will let you name Fido or Tabby as your beneficiary. Unfortunately, this is not the case with Lemonade’s life insurance offering.
If you want to divide up the death benefit, you can name several beneficiaries, and you can divide the money between your loved ones, friends, or organizations as you see fit. You can leave 50% to your spouse and 25% each to your two adult children, for example. Or, you could leave 50% each to your spouse and to your favorite charity. You can also choose to name one primary beneficiary as an “irrevocable beneficiary“, which means they act as a sort of co-owner of the policy, and would need to sign off on any policy changes.
Just in case your beneficiary dies before you, or is unwilling or unable to accept the payout, you can name a contingent beneficiary, who would receive the payout in that event. Just as with primary beneficiaries, you can divide up the money between contingent beneficiaries in any way you please. If your beneficiary dies before you and you haven’t named a contingent beneficiary, the payout from your life insurance policy becomes part of your estate.
Is there flexibility in how the benefit can be paid out?
Yes, though it depends on your insurer. The death benefit can be paid out in a few ways. Typically, it is paid out tax-free to your chosen beneficiary (or your contingent beneficiary if your primary beneficiary isn’t able to collect benefits) in a lump sum, which is how Lemonade’s term life offering operates. Other insurers may offer different options.
Some insurers—but not Lemonade—offer policy’s with what’s called an ‘accelerated death benefit.’ Those with terminal illnesses who are not expected to live much longer, and who need to cover health care expenses, can apply to get some portion of their payout early. To prove their eligibility, policy holders have to submit proof of a short life expectancy and obtain an accelerated death benefit rider. Any portion of the benefit paid while the policy holder is alive is deducted from the benefit amount paid out when they pass away.
How does my beneficiary make a claim for the death benefit?
This process isn’t complicated, but it doesn’t happen automatically. The beneficiary will have to file a death claim with the insurance company.
When you pass away, your insurance company won’t necessarily find out about it right away. So your beneficiary will need to fill out a claim form, or ‘request for benefits’; present a copy of the death certificate to the insurance company; and provide bank account information or request a check. After that, assuming everything checks out, the lump-sum payment should be made in a matter of one or two weeks, though it can take longer if the life insurance company needs more time to review the claim.
Are there scenarios in which the insurer might not pay the claim, or might not pay policy's chosen amount of coverage?
In some cases, the life insurance payout may be less than the face amount of the policy you initially signed up for. For example, with an adjustable life insurance policy, you can adjust your monthly payments or the death benefit over time according to your needs. (FYI, this does not apply to Lemonade’s term life offering.)
There are types of life insurance, like whole life, which accrue cash value from which you can borrow. But if you have borrowed money against the policy’s cash value and not paid it back before you die, that amount will be reduced from the death benefit. And even if you haven’t touched the whole life policy’s cash value before your death, it doesn’t go to your beneficiaries—your insurer keeps it. (This is yet another reason why we’re not so fond of whole life options at Lemonade, and only offer term life policies.)
There are also a few specific circumstances where death benefits will not be paid.
If you left out anything important or gave incorrect information while applying for the policy, the insurer may not honor the claim, or might adjust the payment downward. If your beneficiary takes your life in order to collect the death benefit, under what is known as the “slayer rule,” the insurance company won’t pay them the benefit. And, if the policy owner commits suicide within two years of taking out the policy, insurance companies will not make the payment, though they will often refund premium payments made.