Life Insurance Policy Payouts: How it Works

By Veronica Baxter | Nov 24th, 2019

If you are reading this article, you either: have life insurance yourself and want to know what to tell your designated beneficiaries to expect once you pass; are a beneficiary of a life insurance policy and the insured has not yet passed; are a beneficiary of a life insurance policy and the insured has recently passed, and you need instruction in how to file your claim for death benefits. Here it is.

What is Life Insurance?

First, some basics. People take out life insurance as part of their overall financial plan, usually to ensure the financial stability of their family or their business after they die.  Life insurance can either be Term Life Insurance, which has no cash value until the insured dies, or Whole Life insurance, which does accrue cash value over time. Many companies offer hybrid life insurance products that have aspects of each.

How Do Life Insurance Companies Pay Beneficiaries?

Contact the Life Insurance Company

It is important to contact the insured’s life insurance company as soon as possible following the death of the insured. That way if a premium comes due and remains unpaid, the company knows why. Also, the sooner you file all of the required documents, the sooner you will be paid the death benefits.

Your contact at the life insurance company will be able to provide a list of documents to be submitted with your claim form.

File a Claim with the Life Insurance Company

In addition to the life insurance company’s claim form, also called a “statement of claim” or a “request for benefits,” the following documents are frequently required:

• A certified copy of the insured’s death certificate;
• A copy of the insured’s life insurance policy;
• Any additional documents or information the life insurance company requests supporting the death.

Many life insurance companies make this process available online, in which you can complete the claim form and scan and submit the required documents by simply visiting the company website.

How Beneficiaries Receive the Death Benefit Payment

Most life insurance companies offer several different ways beneficiaries can receive the death benefit:

• One lump sum (usually the default method of payment);
• In installments over time;
• As an annuity, where proceeds and accumulated interest are paid over the lifetime of the beneficiary.

Prior to deciding, beneficiaries should consult with their tax professional to determine the tax effect of the available payout options. As a general note, the payout over time is taxable at a lower rate than the lump sum payout.

When Beneficiaries Receive the Death Benefit Payment

Typically life insurance claims are paid 30 to 60 days following the date the completed claim package is submitted.  This is to avoid high interest rates that are due to beneficiaries if the delay in payment is unreasonable.

What to Do If Your Life Insurance Claim is Delayed

This depends on why payment is delayed. Typical reasons life insurance companies delay paying death benefits are:

• The insured died within the 2-year contestability period;
• The cause of death was homicide;
• The insured died while doing something illegal, such as driving under the influence of drugs or alcohol;
• The insured lied on his or her life insurance application;
• The insured failed to disclose a prior medical condition, serious illness, or surgery;
• The insured failed to disclose participation in activities that the insurer considers high-risk, such as mountain climbing or deep-sea diving.

In any case, beneficiaries should contact an experienced life insurance beneficiary attorney to communicate with the insurance company and ensure that the delay in payment is not unreasonable or to get the interest paid on the death benefit if the delay is already unreasonable.

Payout Delayed Due to Death Within the Contestability Period

The contestability period in the one- or two-year period following the day the policy came into effect, that allows the insurance company to investigate the truth and completeness of the information the insured submitted on his or her application. This is so the insurance company can determine whether the insured committed fraud by lying or failing to disclose material information on his or her life insurance application.

Beneficiaries might have to wait as much as six months to a year while the insurance company investigates.

Payout Delayed Due to Death By Homicide

A claims representative will likely contact law enforcement to find out whether a beneficiary is a suspect. Beneficiaries must wait to be paid the death benefit until the insurance company knows they are not being charged, or that they are cleared of homicide charges.

Payout Delayed Due to Error, Omission, or Misrepresentation on Life Insurance Application

If the insurance company is delaying payment due to some alleged misinformation or omission on the insured’s life insurance application, beneficiaries should contact a national life insurance beneficiary attorney to help them get to the bottom of that. If the cause of death has nothing to do with the alleged misinformation or omission, an attorney can help the beneficiary get paid.

What to Do if Your Life Insurance Claim is Denied

Again, this depends on the reason given for the denial.  Common reasons are:

• Suspected suicide within the contestability period;
• Alleged fraud by the insured;
• Inability to get satisfactory proof of death, if the insured died in a foreign country;
• Death due to a policy exclusion.

An insurance company is not in any way motivated to pay claims because they only make money when they do not pay claims. If your life insurance beneficiary claim has been denied, consult a life insurance beneficiary attorney to look into it and help get you paid.