There’s a lot to plan for when it comes to life insurance, and it doesn’t stop once the policy is established. Once the insured has died, steps will need to be taken to get the death benefit to his or her beneficiaries, but how does that work? How does life insurance pay out?
When the time comes, a claim will need to be filed. Once it’s processed, beneficiaries can start receiving the policy’s death benefit, but how and when they receive that money depends on choices they and the policyholder make.
In this article, we’ll take a look at your options and the steps beneficiaries will need to take to receive a life insurance payout.
How Does Life Insurance Pay Out?
Once a claim is filed and processed, the death benefit will be released. Either the insured or the policy’s beneficiaries may choose how a death benefit is paid out. Here are a few of the most common options:
Lump-sum payments are the most common form of a payout. With a lump-sum payment, the beneficiary receives the full death benefit at once.
Payments can be received in annual or monthly installments. With these specific income payouts, a beneficiary can receive additional money in the form of interest earned on the death benefit. However, this interest will be taxable.
An annuity grants the beneficiaries payments in regular installments throughout their lifetime. If the annuity has no set period and the beneficiary dies while there is still money left in the policy, that money goes back to the insurance company.
With retained asset accounts, the insurance company acts as the bank, keeping the death benefit in an interest-earning account. The beneficiary can then write checks against the balance, though no additional money can be deposited.
Can You Cash Out Life Insurance?
If you have a permanent life insurance policy that accumulates cash value, then you can cash out a life insurance policy while you are still alive.
How Life Insurance Pays Out: Filing A Claim
In order to start receiving a death benefit, a claim must be filed. It may seem daunting, pulling everything together while dealing with the death of a loved one, but preparation will make the process easier. Having the following items ready when you file the claim will help to ensure a smooth process:
Information about the deceased, including name, date of birth, and cause of death
A copy of the life insurance policy - The NAIC’s Life Policy Locator may be able to assist you in tracking policy information down if you are having trouble locating it.
The death certificate
The claim form, which you may be able to find on the insurance company’s website
Proof of your own identity, like a driver’s license
Once you have the necessary information, contact the insurer. You’ll be notifying them of the death and submitting the necessary documents to them directly, either by mail or via their website. From there, they will process the claim, verifying the information, the cause of death, and the beneficiaries’ identities.
While the claim processes, you’ll mostly be waiting. So how long does it take to get life insurance money? Let’s have a look.
How Long Does Life Insurance Take To Pay Out?
In most cases, once a claim is filed, life insurance will begin to pay out within 60 days, but it can take as little as two weeks to start receiving a death benefit. Each state has its own laws regarding insurance payouts, and that can influence how long your claim takes to process.
In general, there is an incentive for the insurer to pay out on a policy as soon as possible, as they may begin to owe interest on unpaid claims.
What Can Delay An Insurance Policy Payout?
The contestability period is a span of time when the life insurance policy is still relatively new, usually 1 to 2 years. If the insured dies within this contestability period, the insurer may review the application for fraud.
Incomplete policy paperwork will delay the claims process. Make sure you have all the necessary paperwork before submitting the claim. It’ll be faster to gather it all up beforehand than to wait on the insurer to get back to you about what’s missing.
The cause of death listed on the death certificate may result in a delay. Homicide, death during an illegal activity (like drunk driving), or death due to a “risky” activity like skydiving may result in a claim being delayed or denied.
If the named beneficiaries are not specific enough, the claim could be delayed. It’s important to be very specific in naming beneficiaries on a life insurance policy. Instead of “children,” for example, list each of your children, specifically.
Other issues with named beneficiaries could delay a payout. If there were changes just before the insured died, if the primary beneficiary is still a minor, or if no contingent beneficiaries were named and the primary beneficiary cannot be located, there may be delays in claim processing.
What’s Right For Me?
The best way to determine which payout type would be best for you or your beneficiaries is to sit down with a financial planner. A trained professional can help you to understand exactly what will fit your needs.
Here are some things to consider:
Receiving payouts in installments, rather than a lump sum, will guarantee an income stream for longer. If there are concerns about how quickly money will be spent, specific income payouts or an annuity may be the best options.
Interest on a death benefit will be taxed. If the death benefit is particularly large, potential taxes on interest may make a lump-sum payout the more economical option.
Some options, like retained asset accounts, are usually only intended for larger death benefits.
There is no time limit on filing a life insurance claim, so you don’t need to feel rushed to collect a death benefit. There is no harm, though, in educating yourself on these topics as early as possible. Understanding the process of life insurance payouts and knowing your options can only help to make a difficult time pass a little more smoothly.