With any type of insurance, there's a lot of new terminology to learn and understand. Life insurance, in particular, includes a number of phrases which can be overlooked or misunderstood — premiums and underwriting, just to name a few.
One particular term you may hear is “death benefit”, which is a crucial part of any life insurance policy. In this article, we'll explain the ins and outs of this term as well as how it works.
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What do we mean by death benefit?
The death benefit basically refers to the amount of money you are covered for under your life insurance policy. When you set the policy, you will designate beneficiaries who will receive the death benefit upon your death. This could be anyone you choose, such as a spouse, family members, friends, or charities.
The money your family and/or loved ones receive could help them with expenses such as living costs, mortgage payments or to pay for your funeral.
Normally, the death benefit is tax-free, the only exception is inheritance tax (IHT), as technically, the policy is deemed part of your estate. IHT will only be paid if your estate is valued over the threshold of £325,000 (as of 2025).
How is the death benefit calculated?
When you apply for life insurance cover, your insurer will want to know how much cover you require and for how long. This is a big decision as it could have ramifications for your loved ones if you don't have enough cover to help support them financially after your death.
Would my family be able to maintain their current lifestyle without my income?
Would they be able to pay off debts, such as a mortgage or personal loans?
How much would they need for immediate expenses, like funeral costs?
Do they have any savings that could be used to cover these expenses?
If you have children, will they need financial support for education or other future needs?
To determine the appropriate death benefit amount, consider your family's financial obligations and future needs. Some people opt for a multiple of their annual salary (e.g., 10-15 times their income).
However, in certain cases, such as if you have health issues, or are older, the insurer may limit the amount of cover you can receive or require a higher premium.
For more information, please see: How Much Life Insurance Do I Need?
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How does a life insurance policy pay out?
In most cases, a life insurance policy will pay upon the death of the policyholder, however, there are certain situations that may affect the payout.
For starters, the type of policy you own will impact how it will pay out. Whole life insurance is typically permanent, paying out regardless of when you die (so long as you continue to pay the premiums).
Whereas with term life insurance, you are covered for a set amount of time (usually between 5-50 years). If you pass away during this time, the death benefit will be paid in full to your family/loved ones. However, if you survive the policy term, your cover will expire, and no death benefit will be paid if you die after this point.
Both types of cover can be purchased as a joint policy, because of this the payout can differ. This can be beneficial for people with joint financial responsibility such as partners or spouses. If you have a first death policy, a payout will only be made after the first death in the couple. While a second death policy will pay out only after both policyholders have passed away.
Life insurance policies also typically include exclusions regarding the cause of death. For example, if you were to die as a result of suicide within a certain period (often the first two years of the policy), the insurer may not pay out the death benefit. This can also include deaths caused by engaging in illegal activities or high-risk activities.
Who can claim on a life insurance policy?
When you die, a claim will need to be made in order for the insurer to pay out the death benefit. If it's a single policy (owned by you) then a beneficiary or the executor of your estate will need to file the claim with the insurer. If it's a joint policy (covering two people) the surviving policyholder will need to make a claim.
Your insurer will need some information such as:
The name of the deceased
Policy number
Cause of death – as stated on the death certificate
The relationship between the claimant and policyholder
In some cases, your insurer may request further information such as medical details from your GP.
Once a claim is made the insurer will access the information provided and eventually make a decision on whether to accept or deny the claim. If accepted, they will pay the death benefit in full to the legal owner of policy. If they are deceased, the money will be sent to their personal representative, usually the executor of their will or estate.
If you have any queries when selecting a death benefit or how the claims process works, you can speak to one of our friendly advisers on
01392 53 97 79
(Monday to Thursday 9am – 5.30pm, Friday 9am – 5pm).
