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Death Benefit Taxation and Claims: A Guide for Beneficiaries

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Updated August 28, 2025

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Death Benefit: A payout to the beneficiary of a life insurance policy, annuity, or pension when the insured person or annuitant dies. — Investopedia / Mira Norian

A death benefit offers financial support to beneficiaries of life insurance policies, annuities, or pensions when the insured passes away. Typically issued as a lump sum or installment payment, these benefits are generally exempt from income tax, providing some relief during a difficult time. Understanding the requirements for claiming and the potential tax implications can help beneficiaries manage these benefits effectively.

Key Takeaways

A death benefit is a payout to the beneficiary of a life insurance policy, annuity, or pension when the insured person dies.
Generally, life insurance death benefits are not subject to ordinary income tax, but interest received in installments may be taxable.
Beneficiaries must submit proof of death and claim forms to receive the death benefit, which typically passes outside of probate.
Types of death benefits include all-cause death benefits and accidental death and dismemberment benefits.
Consulting a financial professional is advisable for understanding the options and tax implications of a death benefit payout.

What Is a Death Benefit?

A death benefit is a payment made to a beneficiary of a contract, such as a life insurance policy, after the insured person dies. It may also be paid as a result of an annuity or pension.

With life insurance, the amount of the death benefit is set in the terms of the contract and is chosen by the policyholder, who makes regular premium payments. Premium payments go up as the death benefit amount increases. Generally, being younger and healthier means paying lower premiums.

Fast Fact

Buying a life insurance policy with a death benefit can provide peace of mind that your loved ones will receive financial support after your death.

Exploring Various Types of Death Benefits

Types of death benefits with insurance policies include all-cause death benefits, accidental death benefits (ADB), and accidental death and dismemberment benefits (ADDB). Let’s look at each type of death benefit in more detail.

All-cause death benefit: A death benefit from a standard life insurance policy is paid for all causes of death except for those specifically excluded in the policy.
Accidental death benefits (ADB): An accidental death benefit is payment typically made as a result of a death included in a rider added to an insurance policy.
Accidental death and dismemberment benefits (ADDB): Accidental death and dismemberment policies are usually added to life insurance as a rider. Death benefits are payments made for deaths from covered accidents. These policies also include accidental dismemberments, or the loss of body parts or functions. Many different insurance companies can help you add these benefits to a policy.

Understanding the Mechanics of Death Benefits

The insurance contract ensures a death benefit is paid to beneficiaries if premiums were kept current while the insured or annuitant was alive.

Death benefits of life insurance policies are commonly issued as a lump-sum payment in the full amount of the benefit. Beneficiaries can also choose to receive the death benefit in fixed installments, like quarterly or monthly, until the proceeds are used up or for a set time.

Beneficiaries can choose an annuity paying installments for life as determined by the insurer. Or they may opt to take only interest payments and then eventually pass on the proceeds to another beneficiary.

Important

Some insurers offer a retained asset account in which the insurance company acts as a bank holding the proceeds and the beneficiary can make withdrawals.

For an insurer to issue a death benefit, it will likely require a completed claim form along with copies of the contract and a death certificate.

Life insurance or annuity death benefits avoid probate, ensuring faster payment. Probate is a legal process in which a will is reviewed to determine if it's valid. If there's no named beneficiary, the insurer pays the proceeds to the estate, possibly leading to probate.

Implications of Death Benefits

Life insurance death benefits usually aren't taxed as income, but annuity beneficiaries might pay tax. Death benefits from pensions are treated differently from benefits from life insurance policies, and they may be subject to taxation.

Warning

While life insurance death benefits paid in a lump sum are not subject to ordinary income tax, if the beneficiary receives the death benefit in installments that include interest, then the interest will be taxable. And if the death benefit goes to your estate, it may be subject to federal or state estate tax if the estate exceeds the estate tax exemption amount.

Essential Steps for Claiming Death Benefits

The process of receiving a death benefit from a life insurance policy, pension, or annuity is straightforward.

First, beneficiaries need to know which life insurance company holds the deceased’s policy or annuity. The policyholder has a responsibility to share policy or annuity information with beneficiaries when they name them as beneficiaries.

Once the insurance company is identified, beneficiaries must complete a death claim form, providing the insured’s policy number, name, Social Security number, date of death, and payment preferences for the death benefit proceeds.

Beneficiaries must submit death claim forms to each insurance company with which the insured or annuitant carried a policy, along with a copy of the death certificate. Most insurers require a certified death certificate listing the cause of death. If multiple beneficiaries or survivors are listed on a policy or annuity, each one must complete a death claim form.

What Are the Tax Implications of Death Benefits?

Death benefits under a life insurance policy are not subject to ordinary income tax, but they may be subject to federal or state estate tax if the death benefit is paid to the estate and exceeds the estate tax exemption limit. Beneficiaries of an annuity with a death benefit may pay income tax on the payments.

What if You Think You’re a Beneficiary of a Death Benefit?

Try to find out from the policyholder whether or not you’re named as a beneficiary—don’t rely on the insurance company to tell you. You can request information from the National Association of Insurance Commissioners’ Life Insurance Policy Locator Service about whether you are a beneficiary on a life insurance policy. To claim a benefit, beneficiaries must submit death claim forms with a copy of a death certificate to insurers.

How Does the Death Benefit Work on an Annuity?

Some annuity contracts allow you to name a beneficiary to inherit remaining annuity payments. Typically, a beneficiary reports annuity income as the plan participant would have included it as gross income, but they may exclude an amount equal to the deceased employee’s payments toward the contract.

The Bottom Line

Death benefits play a crucial role in supporting beneficiaries financially after the insured's death by covering funeral costs and necessary living expenses. Life insurance death benefits typically avoid income tax, providing a lump-sum or installment payout option. Annuity death benefits, however, may be subject to income tax. It is essential to know the insurer and complete the necessary forms, including a death certificate, for claim processing. Consult a financial advisor to navigate the complexities of death benefit taxation and to make informed decisions about distributions.

Article Sources

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Internal Revenue Service. “Publication 525: Taxable and Nontaxable Income.”
Internal Revenue Service. “Publication 575: Pension and Annuity Income.”
Internal Revenue Service. “Instructions for Form 706.”