Life insurance has become one of the most popular long-term financial planning tools. To use it effectively, you need to understand how and when life insurance payouts are made to beneficiaries and how quickly benefits will be paid.
When Payouts Are Made
Usually life insurance benefits are paid after the insured’s death, and after the beneficiary filed a claim with the insurer and submitted a copy of the death certificate and all other necessary documents.
In the majority of cases, insurers must pay claims within 30 to 60 days after they receive all the necessary documents. When a claim is delayed, the insurance company will pay a high interest on the claim amount.
This prompts most insurers to pay the claim on time, however, many claims are still unfairly delayed.
Why Is A Life Insurance Claim Delayed
Several scenarios may lead to a delay in payment of a claim. In the insured dies within the first two years of the policy issue date, the insurance company must contest the policy.
Most life insurance policies contain a provision that allows an insurer to investigate the life insurance application to make sure no material misrepresentations were made on the application.
If the insurer cannot prove that the insured made a misrepresentation on the application, the life insurance proceeds will be paid out promptly. Contesting the policy may take up to a year or even longer.
In some cases, the claim may not be paid at all and the beneficiary may have to resort to litigation to recover his life insurance claim. If a life insurance policy contains a suicide clause, the insurer may refuse paying the claim in case the insured committed suicide. Investigating the insured’s death may take several months and may also result in an unusual claim delay.
Another situation that may delay a claim payment is when the insured died as a result of homicide. If the death certificate lists homicide as the cause of death, the insurance company will require the detective to provide a statement about the circumstances surrounding the insured’s death to make sure the beneficiary is not a suspect.
If the beneficiary is a suspect, the insurer will delay paying the claim until the beneficiary is acquitted of the crime.
How A Payout Is Made
Historically, the proceeds of a life insurance policy have been paid to the beneficiary in a lump sum. Several years ago, major changes occurred in the way the benefits are paid.
One option is an installment-payout option, or an annuity option, where the proceeds and interest are paid out regularly over the life of the beneficiary. This gives the policyowner the opportunity to select a pre-determined, guaranteed income stream for up to 40 years.
For income protection life insurance, many policyowners choose the installment option to guarantee the proceeds will last for the necessary number of years.
Usually life insurance policies pay a benefits after the insured’s death, but within the last twenty years, insurers have structured policies that allow their policyowners to draw against the face value of the policy in the event of a terminal, chronic or critical illness.
Proof of Claim
The life insurance company should be contacted as soon as possible after the insured’s death. The claims representative will contact the beneficiary asking for several documents.
In order to expedite the claim payout, those documents must be produced quickly. The beneficiary must have a certified copy of the death certificate. A claim delay often happens when an insurer cannot get a copy of the death certificate from the beneficiary.
A certified copy of the death certificate may be obtained in the county where the insured died or in the hospital/nursing home where the insured passed away.