When a loved one dies, there are a lot of things that need to happen. And all of those tasks are piled on top of the grieving process. It can be exhausting—a lot of people find themselves unsure of what they need to do to prepare the arrangements, much less what financial needs are going to come up.
Having an idea of how life insurance works, and how it pays out when someone passes can help ease the pressures during a personal moment. Plus, the money one receives from a life insurance policy can be used to offset funeral expenses. Of course, life insurance policies are often purchased to help pay the monthly bills that keep coming, or to pay off debts to avoid accumulating interest.
Let’s take a look at how the process usually works, the different ways policies can be paid out, and the kinds of issues that might arise.
Filing a claim for a life insurance 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.
You must go through a claims process when a life is insured, just like you would with car insurance or home insurance,. This is where the insurance company makes sure the claim can be paid quickly, without any issues. They’ll need a certified copy of the death certificate, and other documents depending on the policy. Many companies take claims submitted through their website. You can also call or write to the insuring company to find out what all is needed. Once approved, most payouts go through quickly.
The types of policies—and payouts
There are different kinds of policies that all have different terms, premiums, and cash values. If you’re looking to customize your life insurance, there are lots of resources to learn about the advantages of certain plans.
But once someone has passed, the term limits are the first factor in making a claim. Plans with universal life insurance or whole life insurance have terms that don’t end. This is called permanent life insurance, and it means these policies cover you through death, regardless. Some plans are called “term life insurance”. This means they last for a specific term (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.
If the person passed within the insurance terms, and the policy premiums were paid regularly, there shouldn’t be many issues with the policy paying out. But how will the money be distributed?
The policyholder or the beneficiary get to decide the method of distribution. There are two common distributions. A lump-sum payout means that the entirety of the policy will be paid upfront. This is the most common and is used as the default for most policies. You can also choose for the money to be paid in installments, as an annuity. Annuities are usually a topic of retirement planning, but they can also be used for life insurance payouts. In an annuity, the interest and balance are paid out regularly, so it works like a monthly or quarterly stream of income. There are tax implications since interest is subject to taxation. So if the benefit is high, a lump sum may reduce that tax burden.
Some insurers can even set up 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 your bank, but one that can only ever be used, never added to.
Can there be problems with insurance payouts?
There are a few unique situations that create issues with a quick payout. In fact, sometimes benefits even go unclaimed. If a person dies soon after opening an account, the death is deemed suspicious, or there were issues with the original application, delays can happen.
First, if a person dies within 2 years of opening the policy, the insurance company will investigate. This doesn’t necessarily mean fraud is suspected—only that the insurer needs enough time to look into the claim to make sure everything is accurate.
If the death is suspicious, the insurer may also choose to investigate. Things like homicide trigger a follow-up to make sure the beneficiary isn’t one of the police suspects. And some clauses don’t pay out if the death was deemed a suicide after opening a policy.
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 looks into the cause of death.
Find out more
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.