Death Benefit

A death benefit is a payout to the beneficiary of a life insurance policy, annuity or pension when the insured or annuitant dies. For life insurance policies, named beneficiaries receive the death benefit as a lump sum and are not subject to income tax.

A death benefit may be a percentage of the annuitant's pension. For example, a beneficiary might be entitled to 65 percent of the annuitant's monthly pension at the time the annuitant dies. Alternatively, a death benefit may be a large lump-sum payment from a life insurance policy. The size and structure of a pension or life insurance policy's payment -- also known as a survivor benefit -- are determined by the type of contract the annuitant held at the time of death.

[Important: while not subject to income tax, life insurance death benefits may be subject to estate tax.]

Individuals insured under a life insurance policy, pension or other annuity product that carries a death benefit enter into a contract with a life insurance carrier at the time of application. Under an insurance contract, a death benefit or survivor benefit is guaranteed to be paid to the listed beneficiary so long as premiums are satisfied while the insured or annuitant is alive. Beneficiaries have the option to receive death benefit proceeds either in the form of a lump-sum payment or as a continuation of monthly or annual payments.

Beneficiaries of life insurance policies receive the death benefit payment free of ordinary income tax, while annuity beneficiaries may pay income or capital gains tax on death benefits received. In either case, proceeds paid through life insurance or annuity death benefits avoid the cumbersome, often costly, process of probate, which ultimately leads to timely payments to survivors.

• A death benefit is a payout to the beneficiary of a life insurance policy, annuity, or pension when the insured or annuitant dies.
• Death benefit claims must be submitted to the insurer with proof of death and proof of the deceased's coverage.
• Beneficiaries of life insurance policies receive the death benefit payment free of ordinary income tax, while annuity beneficiaries may pay income or capital gains tax on death benefits received. 

After an insured individual or annuitant dies, the process of receiving a death benefit from a life insurance policy, pension or annuity is straightforward.

Beneficiaries first need to know which life insurance company holds the deceased's policy or annuity. Policy information is not kept within a national insurance database or other central location. Instead, it is the responsibility of each insured to share policy or annuity information with beneficiaries. Once the insurance company is identified, beneficiaries must complete a death claim form indicating the insured's policy number, name, Social Security number, and date of death, and payment preferences for the death benefit proceeds.

Death claim forms are submitted to each insurance company with which the insured or annuitant carried a policy, along with a copy of the death certificate. If multiple beneficiaries or survivors are listed on a policy or annuity, each individual is required to complete a death claim form to receive the applicable death benefit.