How Additional Death Benefit Works

When a life insurance policyholder dies, the insurance company may pay the beneficiary the accruing death benefits. Generally, the company awards the additional death benefit in specific circumstances. The sums paid come as extra benefits distinct from the policy benefit. Payments issued as death benefits are usually free of income tax. In such situations, the insurer gives the beneficiaries the option to access the death benefit as a monthly, annual, or lump sum payment. As a practice, the beneficiary is entitled to receive the additional death benefit even when the policyholder dies earlier than expected.

The chief determining factor for payment of the additional death benefit is the terms of the insurance contract. The standard or traditional death benefit payment to a life insurance policy beneficiary can either be a percentage of the holder's pension or a significant lump-sum payment. A typical insurance contract usually guarantees the payment of a death benefit to the listed beneficiary. The only requirement is that the insured (or annuitant) should have fully paid the requisite premiums while alive. To accommodate unique personal needs, most insurance companies often give customizable plans to their policyholders, which comes together with the traditional lump-sum benefits.

There are two distinct levels to the traditional life insurance benefits: an increasing death benefit and the level of death benefit. When the insurance holder dies, the latter pays this to the beneficiary. The increasing death benefit usually includes the lump-sum payment and any accumulated cash value (the cash value acceleration depends on the amount of paid premium). The law obligates those living in a US state with legislation for common property laws to name their spouse as the sole beneficiary. This is always the case unless the spouse gives consent to name a different person.

Additional Death Benefit Example

Frank Wills, a 45-year old electrical engineer, secured a life insurance policy with the Jubilee Insurance Company. The death benefit policy was worth $100,000. Frank designated his two sons, John and Jim, as irrevocable beneficiaries. Frank took a policy with a specified cash value component. This was a supplementary insurance policy with a provision that the insurer would pay an additional death benefit to the survivors (the two sons) in the event of Frank's death. To guarantee this, he paid an additional premium (a double indemnity) to the insurer.

The primary reason Frank took this policy was to secure his family's financial well-being, in life or death. To further protect his family, Frank chose the Accelerated Death Benefit Rider. Under this provision, Frank (the policyholder) could access part of the death benefit to pay for his cancer treatment while still alive. In assessing the terms, Frank's insurer determined his life expectancy prospects by accessing a Proof of Life Expectancy from his medical provider).

Frank understood that whenever he accessed any Accelerated Death Benefit Rider payouts for his treatment at the local hospital, it meant the beneficiaries (his sons) would receive fewer benefits in the event of his death. When Frank later died at the age of 65, the insurer assessed the terms of the policy and approved a lump-sum payout to his sons. The additional death benefit took into account that Frank had accessed the balance to cover his cancer treatments. Regardless, the insurer awarded the additional death benefit to Frank's sons in addition to the comprehensive life insurance payment each son received separately.

Significance of Additional Death Benefit

Among the essential life insurance advantages—including the additional death benefit—it is an exemption from income tax. Some policyholders have benefited immensely from their life insurance policy—while still alive—by taking advantage of the Accelerated Death Benefit provision.

To ensure the beneficiaries' interests are protected, the grantor needs to provide the insurer with their comprehensive legal details. These details include legal name (including any middle name), social security number, date of birth, maiden name (if applicable), and nationality.

It's important to note that the policyholder has the right to divide the life insurance death benefit as he pleases. If you're among four designated beneficiaries, it doesn't automatically mean you're in line to receive ¼ of the death benefits; the policyholder can allocate the beneficiaries different percentages. However, since the benefits don't come with conditions or stipulations, the beneficiaries are free to use their money as they want- they may use it to offset their living expenses, as retirement savings, education, or even to pay for a vacation!