What Is an Additional Death Benefit?
Additional death benefit is a term that refers to an amount paid to a beneficiary of a life insurance contract that is separate from the original death benefit. It provides extra sums to the beneficiary in the event of a policyholder's death. The additional death benefit can sometimes be quite large but is only paid when specific conditions are met.
Understanding Death Benefits
Life insurance refers to the contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. Beneficiaries usually have the option to receive death benefit proceeds either in the form of a lump-sum payment or as a continuation of monthly or annual payments. Death benefit payments are free of ordinary income tax, while annuity beneficiaries may pay income or capital gains tax on death benefits received.
- Death benefits are paid to beneficiaries when a life insurance policyholder passes away.
- Additional death benefits are awarded in some circumstances and represent sums that are in addition to the policy's death benefit.
- If a policyholder dies much younger than expected, the beneficiary might receive an additional death benefit.
- The terms of the life insurance contract will determine if an additional death benefit is available.
Traditional or standard death benefits pay out to the beneficiary of a life insurance policy and the amount can be anything from a percentage of the annuitant's pension to a large lump-sum payment from a life insurance policy. Under an insurance contract, a death benefit or survivor benefit is guaranteed to be paid to the listed beneficiary so long as premiums had been paid while the insured or annuitant was alive.
Traditional life insurance benefits include two distinct kinds: the level death benefit and an increasing death benefit. The level death benefit pays the same amount whenever the insured person dies. However, an increasing death benefit includes the lump sum plus any accumulated cash value, with the growth of the cash value depending on the amount of premium paid.
Along with the traditional lump-sum death benefits, insurance companies offer policyholders customizable policies to accommodate personal needs. For instance, one of the most common life insurance riders or additions is the accidental death benefit rider, which provides additional life insurance coverage in the event that the insured's death is accidental. Meanwhile, the accelerated death benefit rider allows the insured to collect a portion or all of the death benefit. The accelerated death benefit rider is sometimes used by policyholders that have been diagnosed with a terminal illness and want to receive part of the benefits to cover the costs of treatments to stay alive.
Example of Additional Death Benefit
Additional death benefit is not a rider, but an extra layer of payment in the event that a predefined situation occurs. It can happen, for example, when a policyholder dies at a much younger-than-expected age and the insurance company approves the death benefit plus an additional benefit.
If an individual has a life insurance policy worth $1 million, their beneficiary receives the $1 million dollars, but this beneficiary may qualify for additional money depending on the circumstances of the policyholder’s death as outlined in the life insurance contract. Additional death benefits can occur for a variety of reasons, and in some policies, beneficiaries can receive an extra $1 million if the policyholder dies within a certain age range.