what is a death benefit

What is a Death Benefit & Are They Taxable?

After the loss of a loved one, there can be a lot of loose ends and legal matters to clear up. In the event that you or someone you know is named the beneficiary of a deceased person’s death benefits, there are some things you should know. You may be asking “What is a death benefit?”, or how you go about learning whether you are entitled to death benefits. Sometimes called “survivors benefits”, death benefits are monetary benefits of  a life insurance policy pay out, annuity or pension left to a named beneficiary. Whether you will be required to pay a tax on death benefits depends on the type of death benefit and the amount received.

What is a death benefit?

When a living person enters into an insurance contract for a life policy, so long as premiums are current, a named beneficiary should receive the total sum listed on the insurance contract, annuity, estate tax, survivor benefits or other pension plan. Payment or pay-out terms are typically based on the terms of the policy at the time of the policy holder’s application, but in most cases, beneficiaries have a few options. While some beneficiaries choose to take a lump sum payment, others may choose a series of monthly payments over the course of several months or years.

What is an annuity and how is it different than a life insurance policy?

A relatively new financial product, annuities are financial packages offered to individuals looking to provide financial security to themselves in retirement, or to provide financial stability to someone after they’ve passed away. There are a variety of different structured plans for annuities. Some require a lump sum to be deposited, others a have a long term contribution commitment. These products, generally offered by insurance and investment companies, are designed to offer consistent income options well into retirement and in the event of death, should offer some financial relief to a person or people left behind. These products generally hold penalties if monies are withdrawn before the terms of the contract have been reached. Unlike a life insurance policy, the policyholder pays into an annuity.

Are Death Benefits Taxable?

Whether or not a death benefit is taxable really depends on what type of policy or agreement the deceased individual had entered into. If you are the beneficiary of a life insurance policy, you will not have to pay taxes on the policy sum as long as the sum you receive is the amount the policyholder purchased. Some insurance policies pay interest on premiums paid, and on occasion the amount a recipient of the policy might receive is more than the policy was worth. In that event, the beneficiary would be required to pay taxes on the amount over and above the purchased policy amount. In some cases, life insurance policies may be included  as part of an estate. If you are the beneficiary, this could affect how much estate tax you may have to pay. Be sure to check with the estate lawyer or representative to learn the details on handling any estate legalities.

 

Beneficiaries of pension plans and annuities should generally expect to pay taxes on these benefit amounts. There are instances where taxes are not due, so if you are on the receiving end of one of these policies, make sure you’ve looked into the terms. Typically, only amounts more than the contract price of the plan are taxable. However, if you’re someone looking to purchase an annuity or sign up for a pension plan for yourself or loved ones, being well versed in your options as you look for policies will help you make the best decision.

 

The last type of death benefits are also known as survivors benefits, and are typically paid out by employers. These are generally accrued salaries, stocks, bonds or other company profit sharing benefits and they are usually taxable. In some cases, employers have life policies and if you are the beneficiary of one of these policies they are generally treated like any other insurance policy.  

How to obtain death benefits if you are a beneficiary

One of the more straightforward and uncomplicated processes when it comes to death benefits is filing the claim. If you are the named beneficiary of a death benefit, simply contact the company that holds the contract or policy. Once you’ve learned who holds the annuity or insurance policy , you’ll need certified copies of your loved one’s death certificate to begin the claim process. Filling out the death claim form is the next step, as well as deciding what payment form the beneficiary would prefer. Payouts are typically made in 30 – 60 days, but there are some situations in which receiving benefits may be delayed.

 

Policy and annuity information stays with the insured. Most beneficiaries are made aware of their entitlements either through an estate lawyer, or their loved one may have notified them before their passing. Learn other steps to take after a loved one passes here.

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