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How Do Life Insurance Payouts Work


life insurance payout

If you have a life insurance policy, you may be wondering how the life insurance payout works and what to expect in that situation. The same goes if you are the beneficiary of someone else’s policy.

The passing of a loved one is a stressful time, and understanding how life insurance payouts work beforehand can provide a bit of comfort during a tumultuous time in your life.

This is an important aspect of estate planning you need to consider, and here’s what to know.

What is Life Insurance and Do You Need It?

At its simplest, life insurance is a contract between you and the insurance company. With term life insurance, you make monthly payments for a specific time period or term (generally between 10 and 30 years). 

If you, the insured, die before the end of the term, the insurance company will pay out the agreed-upon death benefit to your beneficiaries. If you live through the end of the term, the insurance company will keep all the monthly premiums.

Deciding how much insurance you need and the right length of term will depend on your specific situation. As a general rule, life insurance makes the most sense if you have dependents or other obligations that depend on your income. 

One of the classic examples is if you have young children and/or a stay-at-home spouse that depends on the salary that you earn. If you pass away unexpectedly, you want to make sure that your dependents are taken care of. 

However, even if you’re single and don’t have dependents but have siblings and parents, life insurance can be beneficial to them, in the event that you suddenly pass away. 

How Do Life Insurance Payouts Work?

When someone with life insurance passes away, their beneficiaries usually have a couple of different options to receive the death benefit.

Here are some of the most common life insurance payout options:

  • Lump-sum fixed amount—A lump sum payout is by far the most common type of life insurance payout. If you are the beneficiary of a $500,000 life insurance policy, taking this option will give you a one-time payment of $500,000. Generally the payment will be considered tax-free.
  • Installment payout—You can also choose to take the payment over a certain number of years. This might be an attractive option if you are concerned about spending all the money at once. Instead of taking a $500,000 lump sum, you could choose to take a $25,000 payment for the next 20 years. You will owe tax on any interest received.
  • Retained asset account—With a retained asset account, you leave the death benefit in an interest-bearing account with the insurance company. You can then access the money in the account with a checkbook or debit card.
  • Annuity—Another option would be to convert your life insurance to an annuity. With an annuity, you’ll receive guaranteed payments for the rest of your life. The exact amount of your payments will depend on your age and the amount of the insurance payout.

When Will You Receive a Life Insurance Payout?

The first step to receive the payout from your life insurance policy is to file a claim with your insurance company. If you’re not sure how to file a death benefit claim, you can work with your life insurance agent. 

Typically, you’ll need to provide the death certificate and some other paperwork to the life insurance company. It’s important to note that some cities or counties can take a long time to provide a death certificate.

Once you’ve filed a claim and submitted any necessary paperwork, the processing of your claim usually only takes a matter of a few days or weeks. Most insurance companies understand that prompt payout of claims is an important factor in their customer service.

What Can Delay a Life Insurance Payout?

While insurance companies generally pay out quickly (within days or weeks of filing a claim), there are a couple of scenarios that can delay a life insurance payout. 

1. If the insured person dies within two years of purchasing the policy and the insurance company suspects fraud. This includes misstatements or false information on the initial insurance application. 

2. If the insurance company has trouble locating the beneficiaries of the policy.

Also, if there are suspicious circumstances surrounding the death, the insurance company may delay paying out the death benefit to make sure that none of the beneficiaries are charged with a crime relating to the death. 

If a life insurance claim is denied, typically the beneficiaries will just receive the amount that was paid in premiums. The good news is that these types of denials are very rare, and in most cases, the insurance payout will be processed within a matter of a few days or weeks.

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The Bottom Line

Most reputable life insurance companies want to make sure that the payout process is as seamless and quick as possible. The passing of a loved one is a trying time for everyone, especially if there are kids involved, and most insurance companies understand their role in helping to ease some of the burdens when a loved one dies. 

One thing you can do to help speed up the insurance payout process is to make sure that your beneficiary information is up-to-date. Once you file an insurance claim, your insurer will usually issue a payout within a matter of a few days or weeks.

You have several different options for how you receive your life insurance payout. The most common is a lump sum payment for the full amount of the policy. In most cases, the insurer will issue the payment directly to your bank account, though receiving the payout by check is also a possibility. 

Generally, the proceeds of a life insurance policy are tax-free to the beneficiaries. Besides a one-time payment, there may be other payout options available to you. 

Talk with your trusted friends, family members, life insurance agent, or financial advisor to determine the right payout method for your specific situation.

If you’re looking to switch life insurance companies or researching for a loved one, we’ve extensively reviewed tons of life insurance platforms and companies. Check out a quick summary for Quotacy, Ethos, and Ladder and read the full reviews.

life insurance: quotacy
  • Get multiple quotes for term life insurance
  • About 5 minutes for the initial application
  • One of the most robust online life insurance marketplaces
life insurance: ethos
  •  Low-cost online life insurance
  • Easy online application process i
  • No medical checks required. Just answer a few health questions.
life insurance: ladder
  • Online term life insurance
  • Policies available up to $8 million, one of the highest amounts available online
  • Easy policy adjustments

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