Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
Depends on what the face amount of the policy is. If the life insurance is for $500,000 of coverage, the carrier pays out $500,000 to the beneficiary when the insured dies, income tax-free.
If you have permanent coverage with cash value and there's a loan on the policy, the carrier will take out the loan amount and any interest to be paid from the proceeds payout and give the balance to the beneficiary.
If you are the owner of the policy, you are able choose the amount of life insurance that you want to go to your beneficiary. It is called the face amount of the policy. When paid out, it is called the death benefit. As the owner, you do not get anything from the policy unless you have Whole or Universal Life, from which you can take cash value as a loan or surrender; or Return of Premium Term Life, which pays back all the premiums if you live past the end of the term.
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If you have permanent coverage with cash value and there's a loan on the policy, the carrier will take out the loan amount and any interest to be paid from the proceeds payout and give the balance to the beneficiary.