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How Life Insurance Payouts Work

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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:

The most common and simplest form of payout is to receive the entire benefit amount in a single lump sum, which continues to be the default for most policies. This is a good choice for those who have a lot of financial obligations, such as paying off debts or covering funeral costs. You can normally choose to receive the payout in a check or direct deposit to your bank account.

Example: If the policy is set with a death benefit of $100,000, you'll receive $100,000 upon approval of your claim.

The fixed amount option allows the beneficiary to receive a pre-determined figure in each payment until the entire amount has been paid out. In most cases, you'll earn interest on the sum still held by the insurance company. This is a great option for those who want to receive either smaller payments over a longer period of time or larger payments for shorter. If the beneficiary dies before all payments are made, the remainder can be passed to a second person.

Example: If your spouse dies and you want help covering some loss of income for a few years, you might choose to receive $10,000 a year. On a $100,000 policy, payments would then be made over a 10-year period.

Similar to fixed amount, this option lets beneficiaries receive equal payments with each installment, however, it's set with a specific number of years in mind. This is an especially good choice for those who know they'll have financial obligations that will last a certain frame of time. If the beneficiary dies before all payments are made, the remainder can be passed to someone else.

Example: If you're a parent or soon-to-be college student, you might choose to receive payments specifically for 4 years to cover tuition and other costs of living. For a $100,000 policy, you'd receive $25,000 each year.

With straight life income, the insurance company makes set payments over the rest of the beneficiary's life. The company will calculate the amount of these payments based on the beneficiary's age, health, and gender. If they live longer than expected, they could end up receiving more money than anticipated. However, if they die shortly after the payout begins, the insurance company keeps the rest of the money.

Example: With a $100,000 policy, a healthy 70-year-old woman might be given $8,333 a year, with the expectation that she'll live for at least 12 more years. She could receive more or less, depending on how long she lives.

A period life income plan guarantees that a certain portion of the death benefit will be paid over the remainder of the beneficiary's life or a set period of time—whichever is longer. If they pass away before the period of time has ended, a secondary beneficiary will receive the same payments until that length of time has been reached.

Example: On with $100,000 policy, a healthy 70-year-old woman might choose to receive payments of $8,333 for a period of 12 years. However, if she passes away at 75, having only collected just under $42,000, the remaining funds will be paid to a secondary beneficiary in installments over the next 5 years.

With an interest-only plan, you can choose to leave the policy with the insurance company, let it earn interest, and then receive payments of that interest only. The original death benefit is paid out to a secondary beneficiary only when the primary beneficiary dies or reaches a pre-determined age. With these policies, it's important to know whether your interest rate is fixed or variable, and if it's the latter, the minimum and maximum rates you could earn.

Example: A policyholder with a $100,000 plan set to earn 4% interest will receive a payment of $4,000 a year. If they die or reach a certain age, the initial $100,000 will be paid out to their secondary beneficiary.

Joint and survivor life payout plans are calculated with the age and gender of 2 people in mind instead of just 1. They're designed to provide benefits for as long as either of 2 named beneficiaries is alive.

Example: A male and female couple in their 60s might receive payments of $5,000 a year on a $100,000 policy. If one of them dies, the other continues to receive that same amount each year until they pass away. If they both die and the $100,000 benefit hasn't been met, the insurance company keeps the rest of the money.

In addition to your base plan, certain rider policies are available that can allow you, if you're the policyholder, to get payouts before you die. These riders are meant to help cover costs associated with having a chronic, critical, or terminal illness, becoming disabled, or needing long-term care. If you pass away, any remaining funds will be paid out to your beneficiaries in the chosen structure.

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.

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