Life insurance is a popular tool used to secure your family’s long-term financial stability. However, in order to effectively incorporate this tool into your portfolio, you must understand how and when life insurance payments are delivered to beneficiaries.
Understanding life insurance payouts includes knowing how quickly a beneficiary will be paid and determining what payout option will work best for you and your loved ones.
Generally speaking, life insurance proceeds are paid out when the insured has died and the beneficiary(ies) has filed a death claim with the insurance company, submitting a certified copy of the death certificate.
In most states, the insurance company is allowed 30 days to review the claim. During this time period, they can either pay it, deny it or ask for additional information.
Beneficiaries are generally paid within 30 to 60 days of filing a claim.
The insurance company should be contacted as soon as possible following the death of the insured so the claims process can begin. During this stage, the beneficiary will deal with a claims representative who will handle their case. The claims representative will require the beneficiary to submit a certified copy of the death certificate as well as a claims statements, which is also called a “request for benefits”.
While there is no set time frame for when an insurance company needs to pay benefits, they are encouraged to do so as quickly as possible to avoid steep interest charges for delaying payments of claims.
There are several incidents that may warrant a delayed payment of a claim.
For example, if the insured died within the contestability period, which is generally the first two years after the policy was issued, the insured’s beneficiaries may face a delay of six to 12 months.
If this is the case, the insurance company will use this time to investigate the original application to ensure fraud was not committed and will generally pay out if they cannot prove anything illegal has occurred. There also may be a suicide clause that allows the company to deny paying benefits if the insured commits suicide during this time period.
Another scenario that could delay payment is when the cause of death was ruled as a homicide. In this situation, a claims representative and the assigned detective determine if the beneficiary had any part in the death of the insured.
If the beneficiary is a suspect, the life insurance proceeds will be held until the charges have been dropped or they have been acquitted. As you may imagine, if the beneficiary committed the crime or played a role in it, the benefits will not be issued to them.
While the most popular payout option is still the lump-sum payment method, insurance companies have recently introduced new options in which life insurance proceeds can be delivered to the insured’s beneficiaries. These options include an installment-payout option or an annuity option.
With these options, the policy owner has the opportunity to select a predetermined, guaranteed stream of income for a set period of time after they have passed away. This will give the surviving spouse the chance to adjust and get situated with their new life without having to worry about allocating the entire payout for future funds, as the work has been done for them.
Life insurance is an important way to care for your family in the event you are not there to help them yourself. And knowing how life insurance payments are delivered to beneficiaries will help you prepare them for the inevitable.
Want to learn more about life insurance? Read our article The Most Frequently Asked Life Insurance Questions.