Death Benefit
A death benefit is the amount of money paid to beneficiaries upon the death of an insured person, typically the face amount of a life insurance policy.
Exam Tip
Death benefit is income tax-free to beneficiaries. Policy loans reduce the death benefit.
What is a Death Benefit?
The death benefit (also called face amount or face value) is the money paid to beneficiaries when the insured person dies. It's the primary purpose of life insuranceāproviding financial protection for loved ones.
Death Benefit Basics
| Term | Definition |
|---|---|
| Face Amount | The stated death benefit on the policy |
| Net Death Benefit | Face amount minus any loans or withdrawals |
| Beneficiary | Person(s) who receive the death benefit |
Factors Affecting Death Benefit
| Factor | Impact |
|---|---|
| Policy Loans | Reduces death benefit |
| Withdrawals | May reduce death benefit |
| Riders | May increase (accidental death) or decrease |
| Dividends | May increase if used to buy additional coverage |
Death Benefit Options
Level Death Benefit:
- Stays the same throughout policy life
- Most common in term and whole life
Increasing Death Benefit:
- Grows over time
- Common in universal life (Option B)
- Higher premiums
Tax Treatment
Life insurance death benefits are generally:
- Income tax-free to beneficiaries
- May be subject to estate tax if insured owned the policy
Accelerated Death Benefits
Many policies allow partial death benefit access if the insured is terminally ill (typically 12-24 months to live).
Accidental Death Benefit (ADB)
Optional rider that doubles or triples the death benefit if death results from an accident (sometimes called "double indemnity").