How Life Insurance Payouts Work

It doesn’t matter if you’re the beneficiary or the owner of a policy with life insurance, it’s a good idea understand what happens after the policy’s expiration date. The insurance company will send the death benefit to the beneficiary.

Understanding the payouts of life insurance

The identification of a primary beneficiary (or beneficiaries) is an important part of life insurance applications. It can be one person, multiple people, or an entity like a charity.

You may also designate a contingent beneficiary. This is the secondary beneficiary of your policy payout. Your death benefit would be paid to the contingent beneficiary if your primary beneficiary passes away before you do.

A term life insurance policy covers you for a set amount of time, such as 10, 20, or 30 years. It also includes a simple death benefit payout if you die during the policy’s lifetime.

A permanent life insurance policy like whole life will pay a higher payout. This is because it’s more complex.
You can also get a savings component in a whole-life policy that you can access throughout your life. You should be aware that any money borrowed from your insurance policy will be taken out of your death benefit. If you have $500,000 in whole-life insurance and borrow $100,000 to start your business, the beneficiary of the policy will receive $400,000 unless the loan is repaid.

Different types of life insurance payouts

A beneficiary can get the death benefit of a life insurance policy in many ways. The lump sum payment is the most popular. This is usually a lump sum payment. It is usually made in the form a check and is paid to the beneficiary after the amount has been approved. The death benefit amount, less any outstanding loans, would be paid in one payment.

A beneficiary may be allowed to elect an installment payment of the death benefits, which is usually an annuity. An annuity is a periodic payment of a fixed amount of money over a long period. Annuities are a method of receiving a steady income over a longer time period for some beneficiaries.

The third option allows the insurer’s to function as a bank account and hold on to the death benefit until needed. To allow beneficiaries to draw on the funds as they need it, the insurer would issue them a checkbook.

The process of getting life insurance payouts

Although the life insurance payout process itself is straightforward, it requires that beneficiaries make financial decisions and complete paperwork. Here’s what you should do:

Claim the property

Contact the insurance company as soon as possible following the death of the policyholder to learn their process for filing a claim. Most likely, you will need to send a certified copy the death certificate along with additional paperwork such as a claim forms. While there is no deadline to file a claim for benefits, it is important that you do so as soon as possible. The laws in your state will dictate how long an insurer can review your claim. Often, this is between 30 and 60 days.

Problems possible

You will usually receive your death benefit payout from a life insurance policy in a matter of months if you properly file the claim and provide all necessary documentation. There are very rare situations where delays may occur.

The company can contest policies for the first two years that they are in force. In this instance, if the policyholder bought the policy recenty, the insurer might have questions. Life insurance claims on new policies could be a sign of fraud. Benefits might be denied if the death was caused by suicide.

The insurance company may delay payment if the policyholder is murdered. This happens because the insurance company works closely with the police to make sure that the beneficiary wasn’t involved in the crime. The insurer could also delay payment of the death benefit if the applicant lies on the application. Expect to wait for the issues to be resolved in any of these situations.

You have several options for payout

After everything has been approved, you will need to decide how you want to receive your payout. This is the most popular option. A lump sum can help you reach financial goals, such as:

  • Repayment of a mortgage
  • College tuition savings
  • Consumer debt reduction
  • Retirement savings
  • Incorporating an emergency fund

It depends on your financial situation, how you feel about handling the death benefit payout and what you can afford to pay in taxes. You may want to consult a financial advisor.

Questions frequently asked

What amount of life insurance do you need?

It all depends on your goals for the policy. Think about your monthly expenses and long-term debts. Financial experts recommend that you purchase life insurance at a rate equal to 5-15 percent of your annual salary.

What’s the difference between whole-life insurance and term life insurance?

Term insurance is, like the name implies, for a set period of time. This is a less complicated form of insurance than whole-life, and the beneficiary will not receive the death benefit if an insured dies during the policy term. Whole-life insurance is good for your whole life as long as your premiums are paid. Although it is more costly than traditional insurance, you can borrow money from your policy for a specific amount of time.

Do you prefer to make a lump-sum payment or spread it over time?

It depends on your situation. A lump sum may be the best option if you have a lot of debt that you want to pay off quickly. An annuity is a better option if you care more about the ability to provide for your family in the future. A financial professional can help you weigh all options if you’re unsure.