How Life Insurance Payouts Work
Life insurance payouts can be a tremendous help to family members or other beneficiaries after a policyholder passes away. Most people have life insurance plans in place to make sure their families are financially taken care of in the event of their death. However, it's not uncommon for benefits to go unclaimed or for insurance companies to not even be aware that a policyholder has died. If you're a beneficiary, it's important to understand the actions you need to take and what options are available in order to ensure you receive your payout.
How Do You File a Death Benefit Claim?
The first step to receiving benefits is to locate the policy. From there, you can find the name and contact number of the agent who sold the plan, who you can help you get the claim forms you need. Anyone named as a beneficiary on the policy will need to fill out these forms.
You'll need to include the name of the deceased, their policy number, your personal information, and a certified death certificate.
There might be additional paperwork depending on the plan and any riders, or add-on policies, that are in place. Some riders might cause the payout to be greater if the policyholder's death meets certain qualifications. In this case, you'll likely need to provide more information or official documents along with your claim.
Obtaining a death certificate
You'll need a certified death certificate to file a life insurance benefits claim. The easiest way to get a certified death certificate is to order copies through the funeral home or mortuary that you work with, though you can request copies on your own from the vital records office in the state or county where the death occurred.
The process for getting a death certificate is different in each state, so you'll need to figure what exact information you need before going forward. If you don't want to or can't go through the process on your own, you can pay a third-party company to order certificates from the state on your behalf.
How Long Does It Take to Receive Benefits?
The length of time it takes to receive money depends on your state, the insurance company, and the circumstances of the claim.
Every state has regulations regarding how much time a life insurance company is allowed to process claims, though in many cases, it's around 30–60 days of the date you filed.
If there's a delay in payment, insurance companies are required to pay you interest in addition to the benefit amount, so they're motivated to process claims and make payments quickly.
What could delay your payout
There are several situations that could delay your payments for several months or even a year. One of the most common is a result of the 2-year contestability period that's in place for most policies. The clause allows insurance companies to investigate a death that occurs within 2 years of the policy being taken out. This is to ensure that no fraud was committed on the application, such as the policyholder lying about their medical history, smoking habits, or drug use.
Depending on the results of the investigation, you could receive a payout or have the claim be rejected. In the event that fraud was detected, your claim might not be fully denied, but you might not get full benefits either.
An insurance company might determine the rate the policyholder should have been paying if they'd told the truth and deduct the difference from the benefit amount.
The 2-year contestability period also applies to cases of suicide. As a beneficiary, your claim might be denied or you might receive a reduced payment. In some cases, insurance companies won't give you the full benefit amount but will pay you back for any premiums that the policyholder made up until their death.
Another situation that could delay your payout is if homicide was the cause of death. This will likely prompt communication between the insurance company and the detective on the case to determine if the beneficiary is a suspect. If they are, benefits will only be paid if the charges are dropped or the suspect is acquitted.
Death Benefit Payment Options
The policyholder or their beneficiary can choose to set up payments in a number of ways. Different companies will have different settlement structures to choose from, but common options include the following:
Do You Have to Pay Taxes on a Death Benefit?
No. The money received from a death benefit payout is tax-free. However, you will have to pay taxes on earned interest that's paid out to you. It doesn't matter when you accrue the interest on your benefit amount. Any interest earned during delayed payments or over an installment period is taxable as income.