What is a death benefit?

A death benefit is the stated dollar amount and face value of an insurance policy. The death benefit is paid out by the insurance company to a designated beneficiary when the insured dies. The death benefit can also referred to as the face amount or coverage of an insurance policy.

When the insured dies, a designated beneficiary receives the death benefit, less the net cash value, if a traditional life insurance policy. The net cash value is the cash value remaining after deducting applicable penalties and fees known as charges. Deductions normally exist due to any outstanding loans that will reduce the death benefit and any unpaid interest on the loan that will reduce the cash value. In terms of a loan from a traditional insurance policy, we view the death benefit as the principal amount and cash value as the interest amount.

The death benefit is normally level, meaning it never changes once set. This means that although the cash value can grow, once the insured dies, the remaining balance is forfeited to the insurance company.

However, a death benefit can also be increasing or decreasing. With an increasing death benefit, as your cash value grows, so does your death benefit. The nominal face value plus the cash value equals your net death benefit. With a decreasing death benefit, also known as credit life insurance, acts as a derivative. As the balance of an underlying loan or line of credit decreases, so does the death benefit dollar-for-dollar.

Leave a Reply

%d bloggers like this: