What Happens If You Die Before Your Life Insurance Term?
Understand the financial and administrative implications of a life insurance policy when death occurs during the term.
Term life insurance provides coverage for a specific period, offering a death benefit to designated beneficiaries if the insured individual passes away within that defined term. Unlike permanent life insurance, it does not accumulate cash value and covers a set duration. Its primary purpose is to offer financial protection to loved ones during critical periods, such as when supporting a family or paying off a mortgage. If the insured dies within the policy term, the insurance company pays out the death benefit, helping beneficiaries manage financial obligations.
Understanding the Death Benefit and Beneficiaries
The death benefit is the sum of money the insurance company pays out upon the insured’s death within the policy’s active term. This payout provides financial support to those who depended on the insured. The policyholder names specific individuals or entities, known as beneficiaries, to receive this benefit.
A primary beneficiary is the first in line to receive the death benefit. Policyholders can also designate contingent beneficiaries, who receive the payout if primary beneficiaries predecease the insured or cannot accept the funds. If no beneficiary is named, or if all named beneficiaries are deceased or cannot be located, the death benefit typically goes into the insured’s estate. When proceeds become part of the estate, they may be subject to probate, a legal process that can delay fund distribution and potentially reduce the amount received due to associated costs. Ensuring beneficiary designations are current and clear helps avoid complications and ensures funds reach intended recipients.
Initiating the Claim Process
When an insured individual passes away, beneficiaries or their representatives must initiate a claim to receive the death benefit. The first step involves identifying the life insurance company; knowing the company name is often sufficient to start the process. Many insurers offer online claim forms or can be contacted directly by phone.
A certified copy of the death certificate is a required document for filing a life insurance claim. This official document verifies the death and its circumstances, and beneficiaries obtain it from the local vital records office or the funeral home. Secure multiple certified copies, as various institutions may require them. Along with the death certificate, beneficiaries complete the insurer’s claim form, providing personal information about the deceased and the claimant, and details about their relationship.
After submitting the completed claim form and certified death certificate, the insurance company reviews the claim. This process takes about 30 days, though it can be longer if further investigation is needed, such as if death occurred within two years of policy inception. Once approved, beneficiaries choose how to receive the payout, with a lump sum being the most common option. Other possibilities include receiving payments in installments over a fixed period, or through a retained asset account, which functions similarly to a checking account established by the insurer.
Tax Implications of Life Insurance Proceeds
Life insurance proceeds paid to a beneficiary due to the insured person’s death are not subject to federal income tax. The Internal Revenue Service (IRS) does not require beneficiaries to report these amounts as gross income.
However, certain situations can lead to taxation. If the death benefit is held by the insurer and earns interest before being paid out, that accrued interest is considered taxable income to the beneficiary. Additionally, if the life insurance policy names the deceased’s estate as the beneficiary, the proceeds become part of the estate and could be subject to federal estate taxes if the total estate value exceeds the federal exemption threshold. For 2024, this federal estate tax exemption is $13.61 million for individuals. While most states do not impose an inheritance tax, a few states may tax beneficiaries on inherited assets, including life insurance proceeds, depending on the relationship to the deceased and the amount received.