How Life Insurance Works: What Beneficiaries Must Know About Receiving the Death Benefit

Losing a loved one is never easy, and it can be especially difficult to navigate the financial aspects of their passing. If your loved one had life insurance, you might be wondering how the death benefit works and what steps you need to take to receive it. 

In this blog post, our life insurance lawyer will explain how life insurance works after the death of the insured and how life insurance is paid out.

What Is Life Insurance?

Life insurance is a contract between the policyholder and the insurance company. The policyholder pays a premium, and in exchange, the insurance company agrees to pay out a death benefit to the policyholder’s beneficiaries upon the insured’s passing. The policyholder may have the policy on their own life (be the insured) or have a policy on another person.

Types of Life Insurance

Generally speaking, there are two categories of life insurance: whole life insurance and term life insurance. Term life insurance protects the policyholder for a specified period of time. Whole life policies, by contrast, remain in existence throughout the life of an insured. In general, premiums on term insurance policies pay only for the cost of providing the insurance, while at least some whole life policies have some type of participatory investment or savings feature.

How does term life insurance work?

Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. If the insured person passes away during the term, the death benefit is paid out to their beneficiaries. If the policyholder outlives the term, the policy expires, and there is no payout. Term life insurance does not count as an asset because this form of life insurance does not have an accumulated cash value.

How does whole life insurance work?

Whole life insurance provides coverage for the insured’s entire life. As long as the policyholder pays the premiums, the death benefit will be paid out to their beneficiaries when the insured person passes away. Whole life insurance accumulates a cash value that the owner can access so that it can be counted as an asset.

Traditional whole life insurance policies require payment of a fixed monthly premium. The cost of life insurance for any insured increases over time as the insured ages and becomes more likely to die. In order to spread out this insurance cost into fixed monthly premium payments, the premium charged earlier in the life of the insured is greater than the actual insurance cost, and the premium charged later in life is less than the actual insurance cost. 

The amount of early year premiums paid in excess of actual insurance costs goes into a cash reserve that accumulates in a value called the policy value. This policy value functions like a savings account. When the insurance cost exceeds the fixed monthly premium later in life, the policy value is used to supplement the fixed premium in order to cover the total actual insurance cost. 

During the life of the insured, the policyholder may choose to cash out his accumulated policy value by “surrendering” the policy. Though surrender causes the policyholder to lose life insurance protection, he is able to withdraw the balance of the policy value in cash, subject to any surrender charges specified in the contract.

Universal life insurance is similar to traditional whole life insurance but with a main distinguishing feature — the policyholder is not required to pay a fixed monthly premium.

Who Receives the Death Benefit?

The death benefit must be paid to the named beneficiary. In some beneficiary dispute cases, the death benefit is paid to a person other than the named beneficiary.

If you want to learn more about beneficiary disputes, read our post about contesting a life insurance beneficiary designation.

How Does a Beneficiary Make a Claim?

If you are a beneficiary of a life insurance policy, there are several steps you will need to take to receive the death benefit.

  • Obtain a Death Certificate: The first step is to obtain a certified copy of the policyholder’s death certificate. This document will be required by the insurance company to process the claim.
  • Contact the Insurance Company: Next, a beneficiary will need to contact the insurance company to initiate the claims process. The company will send them a claim form. A completed claim form and a copy of the death certificate need to be sent back to the insurance company to start the claim process. 
  • Wait for the Claim to be Processed: Once the insurance company receives the necessary paperwork, they will begin the process of verifying the claim and determining the payout amount. This process can take several weeks. If the claim review is not finalized after 30 days, beneficiaries may need to contact a life insurance attorney to understand their options.
  • Receive the Death Benefit: Once the claim has been processed and approved, the insurance company will issue a check for the death benefit to the beneficiaries. In some cases, the beneficiaries may have the option to receive the payout in installments instead of a lump sum.

Read more on our post about how to file a life insurance claim for benefits after death.

How Is Life Insurance Paid Out to Beneficiaries?

Life insurance is typically paid out to beneficiaries in a lump sum, although there may be other payout options available depending on the policy and the insurance company. 

Here are some of the most common ways that life insurance is paid out to beneficiaries:

  1. Lump sum payment: This is the most common way that life insurance is paid out. The entire death benefit is paid to the beneficiaries in one lump sum, usually within a few weeks of the insured person’s death. The beneficiaries can use the money for any purpose, such as paying off debt, covering living expenses, or investing in the future.
  2. Installment payments: Some insurance companies offer the option to receive the death benefit in installments over a specified period, such as monthly or annually. This can help beneficiaries manage the money more effectively and not spend it all at once.
  3. Annuity: An annuity is a financial product that provides a guaranteed income stream for a specified period, such as 10, 20, or 30 years. Some life insurance policies offer the option to receive the death benefit as an annuity, which can provide a steady source of income for the beneficiaries.
  4. Life insurance checking account: Some insurers offer to set up a checking account within the insurance company and deposit the death benefit into such an account. The beneficiary will receive a checkbook and can make withdrawals and write checks from the account. 
  5. Combination of options: Some insurance companies allow beneficiaries to choose a combination of payout options, such as a lump sum payment followed by installment payments or an annuity. This can provide flexibility and customization to meet the beneficiaries’ specific needs and goals.

What to Do if the Life Insurance Payout Is Delayed or Denied?

If a life insurance payout is delayed or denied, it can be a difficult and frustrating experience for the beneficiaries. Here are some steps to take if this happens:

  1. Contact the insurance company: The first step is to contact the insurance company and ask for an explanation of the delay or denial. There may be a simple administrative issue that can be resolved quickly, or there may be a more complex issue that needs to be addressed.
  2. Review the policy: Review the policy carefully to make sure that the delay or denial is not due to a misunderstanding or misinterpretation of the policy. If there are any questions or concerns, consult with a life insurance lawyer. 
  3. Provide additional information: If the insurance company requires additional information or documentation, provide it as soon as possible to help expedite the process.
  4. Seek legal assistance: Dealing with a delayed or denied life insurance payout can be emotionally and financially challenging. Consult an experienced life insurance attorney if your life insurance claim is denied or delayed. Call (888) 510-2212 for a free consultation. 
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About the author

Attorney Tatiana Kadetskaya has over 10 years of experience in life insurance law representing beneficiaries and policy owners. She is best known for successfully collecting denied and delayed claims and settling complex beneficiary disputes and interpleader lawsuits.

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