What Is Death Benefit? Definition

Why it matters

Families use the death benefit to cover funeral costs, debts, living costs, and lost income. The amount depends on the face amount, riders, and any loans. Some policies pay less during an early waiting period. Federal rules often exclude the payout from income tax, but there are exceptions such as interest paid or transfers for value. Ask a tax professional about your case.

Source: irs.gov

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Related terms

Face Amount: The face amount is the dollar amount of coverage stated on the policy. It is the base death benefit the carrier agrees to pay, before any loans, riders, or reductions.
Beneficiary: A beneficiary is the person or organization the policy owner names to receive the death benefit when the insured person dies. A policy can name one or several beneficiaries and can split the payout by percentage.
Graded Death Benefit: A graded death benefit is a payout that is only part of the face amount, or a return of premiums with interest, if the insured dies of natural causes in the first years. Full coverage starts after that waiting period.
Modified Death Benefit: A modified death benefit limits the payout during an early period, often the first two or three years, if the insured dies of natural causes. After the period ends, the full face amount is paid.
Funeral Costs: Funeral costs are the expenses for a funeral or other final arrangements, such as services, a casket or urn, a burial plot or cremation, and transport. Prices vary widely by provider and location.

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