How Do Life Insurance Death Benefits Pay Out?

When a loved one dies, there are a lot of things that need to happen, and it can feel exhausting when all the final arrangements are piled on top of grieving.

Having an idea of how a life insurance death benefit works when someone passes can help ease the pressure during a challenging time, so let’s look at how the process usually works, the different ways policies can be paid out, and issues that may cause delays.

Related: How Does Life Insurance Work?

Filing a Claim for a Life Insurance Death Benefit Payout

We know that losing a loved one is a difficult period in a person’s life. And dealing with the duties of paperwork are the last thing people want to worry with. But it’s important to contact the life insurance company as soon as possible after the policy holder’s death to start the claims process.

Just like car insurance or home insurance, there’s a claims process when it comes to life insurance. Insurance companies typically need a certified copy of the death certificate and other supporting documents depending on the policy. Many companies take claims submitted through their website, or beneficiaries can also call or write to the insurance company or talk to the insured’s agent. Once approved, most life insurance death benefit payouts are sent quickly.

The Types of Policies—and Life Insurance Death Benefit Payouts

There are different kinds of life insurance policies that work in unique ways. The type of policy an insured has may impact if and how death benefits are paid to a beneficiary.

For example, permanent life insurance, such as universal life insurance, variable life insurance, and whole life insurance, have terms that don’t end. These plans never expire and can last the entire life of the policyholder, as long as premiums are paid.

On the other hand, term life insurance is a type of policy that lasts for a specific amount of time. For example, a 30-year term life insurance policy bought at 30 years old will expire at 60 years old. If a person dies outside of the term of the policy, the policy won’t pay out.

However, if the person passes within the policy term, and the policy premiums were paid regularly, the policy should pay a life insurance death benefit. But how will the money be distributed?

The policyholder or the beneficiary gets to decide the method of distribution. Here are examples of common distributions.

  • A lump-sum payout means that the entirety of the policy is paid upfront. This is the most common and is used as the default for most policies.
  • Some policies have an option for the money to be paid in installments, such as through an annuityAnnuities are usually a topic of retirement planning, but they can also be used for life insurance death benefit payouts. With an annuity, the interest and balance are paid out regularly, so it works like a monthly or quarterly stream of income. However, because interest is subject to taxation, there could be tax implications. For that reason, many people prefer a lump-sum payout.
  • Some insurers offer a retained asset account, where the insurance company acts like a bank. The beneficiary is given an account and can access the money. It’s kind of like having a checking account at a bank, but one that can only ever be used, never added to.
Can there be Problems with Life Insurance Death Benefit Payouts?

There are a few unique situations that can create issues with a quick payout.

  • If an insured person dies within two years of opening a policy, the insurance company may investigate. This doesn’t necessarily mean fraud is suspected—only that the insurer needs enough time to review the claim and make sure everything is accurate.
  • If the death is suspicious, the insurer may also choose to investigate. Situations like homicide often trigger a follow-up to make sure the beneficiary isn’t one of the police suspects. And some policies don’t pay out if the death is deemed a suicide.
  • Lastly, the insurance company is going to review the original application to make sure the insured didn’t lie. If the person who bought the policy didn’t explain high-risk health issues like diabetes, there may be a delay in the payout while the insurance company investigates the cause of death.

Want more? Check out our blog, Life Insurance at Every Stage of Life.

Find out more about Life Insurance Death Benefit Payouts

Whether you’re learning more about life insurance as you look into a policy for yourself, or trying to find out where to start with a claim, the information here is a great place to start. If you still have questions about life insurance, you can contact us here.

 

This material provides general information about the described insurance product(s) for educational purposes only. This is not intended as investment advice or to recommend the insurance product(s).

The Company and its producers do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors. The general and educational information presented in this material is a sales and marketing piece for insurance products offered by Bankers Life and Casualty Company.