How does a life insurance payout work?
Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account. Check with the insurer to see which life insurance payout options they offer. Note that if the policyholder named multiple beneficiaries, each must file a claim for their payout portion.
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Life insurance payout options
Many life insurance policies pay out as a lump sum once the beneficiaries' claims are approved. However, depending on the insurer, beneficiaries may also have the option of a life insurance annuity or even a retained asset account.
Here's how the life insurance payout options work:
Lump sum payout
A lump sum payout disperses your full portion of the death benefit tax-free via a check or directly into your bank account. If your payout is larger than $250,000, you might consider splitting the deposit between multiple accounts. The FDIC only insures deposits up to $250,000 per depositor, per insured bank.
Annuity payout
A life insurance annuity provides a steady income stream to the beneficiary. The insurer pays out the death benefit regularly over a set timeframe, while they keep the remaining amount in an account that earns interest until it's fully paid out. This life insurance payout option isn't always available, and interest earned on the remaining death benefit may be subject to taxation.
Retained asset account
Some insurers can hold onto your life insurance payout in a retained asset account, so you can withdraw funds as needed. The account operates much like a checking account — you can withdraw your balance at any time, and it's interest-bearing. Any interest earned may be subject to taxation, but the original insurance payout remains tax-free.
How term life insurance pays out
Term life insurance pays out a death benefit to the beneficiaries if the insured dies within the term of the policy. The policy term can range from one to 30 years. When the insured dies, the beneficiaries must file a claim with the insurance company, providing the death certificate and other required documents.
How whole life insurance pays out
Whole life insurance pays out a death benefit to beneficiaries, but it also contains a savings component known as the policy's cash value. When the insured dies, the policy pays the death benefit to the named beneficiaries. If a whole life policy has flexible payout options, the beneficiaries have several options for how they can receive the death benefit whether in a lump sum, installments, or as an annuity.
When you file a life insurance claim, ask the insurer about your payout options. Every situation is unique, so you should also consult with a financial advisor regarding the potential tax implications of your payout choice.
What is the life insurance payout process?
The beneficiary must contact the insurance company as soon as possible after the insured's death to file a claim. They will need to file the following:
- A certified copy of the death certificate
- A claim form
- Any additional paperwork the insurance company requests
Once the beneficiary has submitted a claim with all the required documentation, the insurance company will review the claim. Once they have reviewed and approved the claim the insurance company will issue a check to the beneficiary.
If you want your minor child to be a beneficiary of your insurance policy, you could name your spouse, the child's other parent, or the child's guardian to receive the life insurance policy payout on the minor child's behalf.
How is life insurance paid out to beneficiaries?
The life insurance policyholder will have named at least one or more primary life insurance beneficiaries. They may have also named contingent beneficiaries. And in rare cases, there may be no beneficiary still living. Here's how each situation would affect the life insurance payout after the death of the insured:
| Beneficiary type | Payout |
|---|---|
| One primary beneficiary | PayoutOnly this person, charity, or trust can claim and receive the policy's payout. |
| Multiple primary beneficiaries | PayoutThe policyowner will have designated a percentage or dollar amount for each beneficiary. Each needs to file a claim for their portion of the death benefit and choose their payout option. |
| Contingent beneficiary(ies) | PayoutIf all primary beneficiaries have passed away, the payout may be claimed by any contingent beneficiaries. If multiple contingent beneficiaries are named, each must file a claim for the portion designated to them by the policyowner. |
| No beneficiary | PayoutIf no primary or contingent beneficiary is living when the insured passes, the death benefit will be paid out to the insured's estate. It will go through the probate process and may be subject to claims from lenders before it's distributed to the insured's heirs. |
Some factors which can affect the death benefit include:
- Life insurance loan: If the insured has taken a loan against the cash value of the policy, but has not paid it back, the unpaid life insurance loan may reduce the death benefit.
- Decreasing term policy: In the case of a decreasing term life insurance policy, the death benefit diminishes over time. The insured's beneficiaries will receive the death benefit amount available at the time of death if the policy has not yet expired.
How much does life insurance pay out?
Life insurance typically pays out an amount equal to the policy's defined death benefit. However, the death benefit may be lower if the policyholder used a life insurance rider to access the death benefit while they were alive or took out a loan against their policy's cash value (in the case of whole life or other type of permanent life policy).
What is the average life insurance payout?
According to Statista, the average face value of life insurance policies purchased in the U.S. was $168,000 in 2018, which is the most recently available data.
How long does it take for a beneficiary to receive money from life insurance?
It can take between 30 and 60 days from when the insurance company receives a claim from the beneficiary to issue the payout. There are several factors that can cause a delay in the payout including:
- Cause of death
- Incorrect paperwork
- Policy lapse
- Suspected fraud
A claim could take longer than 60 days in the rare case when the insurer may take longer to investigate the claim, such as when the insured dies within the first two years that the policy was active.
What disqualifies a life insurance payout?
A life insurance company might deny a life insurance claim and disqualify a payout for several reasons including:
- Policy delinquency or lapse due to non-payment of premiums: If the insured failed to pay the premiums and the policy lapsed, the insurance company is no longer obligated to pay the death benefit.
- Contestability period: Some policies have a two-year contestability period. If the insured dies within that period, the insurance company will investigate the claim to rule out fraud or misrepresentation. If foul play has taken place, they can deny the claim.
- Material misrepresentation or fraud: For example, if the insured failed to disclose a health condition that would have affected the policy, the company can deny the claim.
- Risky behaviors or policy exclusions: If the death was due to a risky activity or illegal activity or suicide, it can exclude the death from coverage.
What is the time limit to claim a life insurance payout?
There's technically no time limit to claiming life insurance. Starting the process sooner rather than later can help the life insurance payout process go smoothly. If you're managing a loved one's affairs after they pass, notify all known life insurance beneficiaries so they can start their claim with the correct insurer.
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