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Life insurance is a critical part of a holistic financial plan. It helps provide additional financial protection for your loved ones after you're gone.
However, signing up for a policy and paying your premiums are only parts of the equation. It's also important to educate your loved ones about the steps they'll need to take to file a life insurance claim and receive a life insurance payout.
It may be a difficult topic to discuss. Still, it's best that your beneficiaries have all the necessary information and are prepared for the process. Here's some of what you should know.
Types of Life Insurance
The payout your loved ones receive will depend on the type of life insurance policy you have. There are two main types of life insurance coverage:
- Term life insurance. Term life insurance coverage expires after a set term. Insurers typically offer term policies in five-year increments, sometimes ranging all the way up to a 40-year policy. You can maintain this coverage as long as you pay your monthly or annual premium. However, after the end of the term, you'll no longer have coverage and your beneficiaries won't receive any life insurance payout upon your death.
- Whole life insurance. Whole life insurance is permanent life insurance. Your coverage never expires as long as you continue to pay your premiums. One of the distinguishing features of whole life insurance is that it includes a cash value component where part of your premiums have the potential to grow over time. With whole life insurance, you can withdraw the policy's cash value or take out a loan against the policy, although doing so would reduce the death benefit.
Term and whole life policies typically offer different payouts depending on what's outlined in your policy. It's crucial to read the fine print before you purchase coverage to understand the death benefit your loved ones could receive and what the claims process will entail.
Some of the Ins & Outs of Life Insurance Payouts
Whether you have term or whole life insurance, your policy will detail what death benefit, or life insurance payout, your loved ones will receive upon your death.
Only the beneficiaries you specifically designate in your policy are entitled to receive a payout. Many people designate their spouse and children as beneficiaries, but it's entirely your choice. You could even name a family trust, business or charity as your beneficiary. Be aware, the rules around those are more complex. It's best to contact an estate planning attorney in such instances.
It's also important to know that life insurance payouts generally aren't subject to income taxes. Your loved ones likely will receive the full death benefit listed in your policy.
How Your Life Insurance Payout Is Determined
When you apply for life insurance coverage, you can ask for a specific policy amount. People generally determine their coverage needs based on their current age, the amount of income their loved ones will need to replace and the number of years their family would need this income. For example, if you make $100,000 a year and estimate your family will need to replace your income for 25 years, you may want to apply for a $2.5 million life insurance policy. Ultimately, an insurer will decide whether to approve you for this amount, based on factors including your age, gender, health, medical history and more. The company also will set your premiums.
When you sign up for a policy, you'll name your beneficiaries and choose how to allocate your life insurance proceeds. Your policy's payout can be divided evenly among all your named beneficiaries, or you may choose to leave more to one person than another, such as leaving more to your spouse than for your minor children. It's important to be very clear about this at the outset, so your loved ones aren't surprised when they file a claim after your death.
Life Insurance Payout Options
Insurers typically pay out life insurance proceeds in two ways — via a lump sum or in installments.
Lump Sum Payment
With the lump sum option, your beneficiaries receive the entire death benefit at one time. This may be best if your beneficiaries have expenses they need to cover immediately, such as funeral costs or mortgage payments. But disbursing life insurance proceeds all at once can be risky if it's a large amount of money and your beneficiaries may not be in a position to manage it properly.
Installment Payments
Your beneficiaries also have the option to receive an insurance payout in installments. With this option, an insurer will disburse a portion of the life insurance payout regularly, such as monthly or annually. Your beneficiaries can choose the installment term based on their financial needs. The installment option can help to make sure that the money doesn't run out prematurely and that it's used as you intended, such as to pay for everyday long-term expenses, like housing, food and ongoing education costs.
Beneficiaries also can receive a payout with a life income or interest income option.1 With life income, a beneficiary can convert the payout into an annuity and receive guaranteed ongoing income based on the death benefit amount outlined in your policy and the beneficiary's life expectancy at the time they choose this option. With the interest income option, the beneficiary receives only the interest that accumulates on the policy's death benefit while the insurer holds on to the actual proceeds, which it will then distribute to a secondary beneficiary after the original beneficiary's death. This helps a beneficiary carry forward the original policyholder's financial legacy to future generations. It can be especially effective if the beneficiary is already financially secure and doesn't immediately need the life insurance proceeds.
Your loved ones will have several options for how they can receive an insurance payout. It's ultimately their decision based on what they believe works best for them. Regardless of the manner of payout, though, they will first have to file a claim.
How to File a Life Insurance Claim
Claims processes vary by insurer. Still, the usual first step is to obtain copies of the insured person's death certificate.
Next, the beneficiary will need to contact the insurance company to find out what forms must be submitted. An agent from the company will explain the claims process and provide the required forms.
Once the beneficiary receives the forms, they must complete them and submit them to the insurance company, along with a certified copy of the death certificate. If the insurer needs any additional information after receiving the forms, they'll likely contact the beneficiary directly.
Once the insurance company has all the required documentation, they will review the claim, factoring in the policy's specific provisions and any applicable laws. It's important to note that certain policy provisions may prevent beneficiaries from receiving a payout depending on the cause of death and whether you missed any premium payments. It's crucial for beneficiaries to be aware of these possibilities before filing a claim.
The process can take several weeks. If the insurer approves the claim, the beneficiary can then choose the payout option that works best for them. Insurers typically disburse payments within 30 to 60 days after that.
Help Provide Your Family Needed Financial Protection
It's not easy to talk about life insurance and how beneficiaries can collect the proceeds. But it's an important conversation to have.
Make sure your beneficiaries have a copy of your policy. This can spare your family the time and stress of searching for documents or contacting your employer or your state's department of insurance to find out if you had coverage and what company to contact for more information.
It's important to note that beneficiaries don't have to rush to file a claim. Losing a loved one is one of the most difficult things a person will ever experience. Given that, they should take the necessary time to grieve. Beneficiaries may also have to handle other affairs first, such as selling their loved one's home or stepping in to manage their business succession plan. Generally, there isn't a deadline to file a life insurance claim, so beneficiaries needn't worry about potentially losing access to the payout.
Providing for the Future
As it's often said, life insurance is for the living. From this perspective, an insurance payout isn't just about money. It's the ultimate gift — and an example of the long-lasting financial legacy — a loved one can leave behind for future generations.
If you are interested in purchasing a life insurance policy or wish to learn more about the payout process, contact a financial professional for assistance. They can provide a personalized look at your individual situation and offer insightful guidance.
Sources
- How do I file a life insurance claim? https://www.iii.org/article/how-do-i-file-life-insurance-claim.
