How Does Life Insurance Payout Work After Death?

Life insurance has become one of the most popular long-term financial planning tools as it provides financial support when the family needs it. However, navigating life insurance claims review can be quite confusing. While it seems pretty straightforward, it is not always the case. There are a lot of factors along the way that can influence who receives the money, when, how and how much. To avoid disputes or other difficult situations, especially while still grieving the loss of a loved one, it is important for beneficiaries to understand how life insurance payments work.

In this article, our life insurance lawyers explain everything you need to know about life insurance payouts and what to expect as a beneficiary when you file for death benefits. Many clients asked these questions when they consulted with us about their delayed or denied life insurance claims.

If you are the beneficiary of a life insurance policy and need clarification about how payments work, feel free to contact us. Call (888)-510-2212 for a free consultation with one of our attorneys.

How Life Insurance Policy Payout Works

After the insured dies, the life insurance proceeds go to the beneficiaries listed on the policy. When setting up a policy, the policyholder names one or more beneficiaries who receive the death benefit. Once they file a claim for the death benefits, the insurance company will review the policy and, if they find no reasons to deny the claim, will issue the payout.

Life Insurance Death Benefit Payout Options

Insurers offer various payout options for life insurance death benefits. Beneficiaries can often choose how they receive the life insurance death benefit.

Here are the payment options available:

  • Lump Sum. If a beneficiary chooses this option, the insurer will send the total amount of the death benefit via a check or a bank transfer to the beneficiary. 
  • Personal Transition Account. This account is a lump-sum payment option available to beneficiaries who prefer to keep their money in a special account that earns interest with a guaranteed minimum rate and gives them full access to the benefit through a draft book/checkbook. The beneficiary can use the draft book to withdraw the full balance of the account at any time or draft smaller amounts. This payment option allows beneficiaries to consider long-term financial decisions while having full access to the total amount. 
  • Proceeds Held at Interest. This option is similar to the Personal Transition Account in that the insurance company holds the money that earns interest at a declared rate. Beneficiaries have full access to the entire proceeds at any time. The difference is that the claim is usually higher, and withdrawals must be $100 or more. 
  • Annuity Options. This is a deferred payment option, which pays out the proceeds over a period of time. Under annuity options, payments will be made to beneficiaries in equal installments until all proceeds and interest are exhausted. Annuity options may be for a fixed amount (equal payments are paid until the balance is exhausted) and for a fixed period (equal installments are calculated and paid over a certain period of time.) 
  • Annuity Options with Life Contingency. Under this option, payments continue for as long as the beneficiary lives. The amounts paid may end at the time of death or continue for a guaranteed period to a survivor.

Generally, the payout option is chosen when the claim is filed by the beneficiary and approved by the insurance company. Whether the insured or the beneficiary chooses the payout option depends on the life insurance company and policy. However, in most circumstances, the beneficiary decides how to receive the payout after they file a claim and the insurer approves it.

When and How to Claim the Life Insurance Payout

Every life insurance policy has a provision outlining a procedure for filing a claim. It usually describes how soon a claim for benefits should be submitted and how it must be filed. It specifies such details as the deadline for submitting a new life insurance claim, notice of claim, and proof of loss.

It is best to contact your life insurance company as soon as possible after the insured’s death. The claims representative will let you know the documents needed to review the claim. The beneficiary must have a certified copy of the death certificate and all supporting documents ready when filing a claim.

A claim delay often happens when an insurer cannot get a copy of the original death certificate from the beneficiary or if they do not receive all the documents they require. Read our guide to learn more about the steps you should take to correctly file a claim and ensure your death benefits are paid in a timely manner.

How Long Does It Take to Collect Life Insurance Payouts?

A life insurance company will not automatically pay life insurance benefits after the insured dies. The beneficiary will have to file a claim with the insurer and submit a copy of the death certificate and all other necessary documents. Each may need to provide a request form if there are multiple beneficiaries.

In most cases, insurers must pay claims within 30 to 60 days after receiving all the necessary documents. This means that the faster a beneficiary submits the claim, the sooner they will receive the payout.

When a claim is delayed, the insurance company must pay interest on the claim amount. This prompts most insurers to pay the claim on time. However, many claims are still unfairly delayed. Your claim may be delayed when a life insurance claim is not paid within 30 days from the date you submitted all the necessary documents to the insurance company.

Our life insurance lawyers explain more about the reasons that may lead to a denied or delayed payment claim.

Who Gets the Life Insurance Payout?

Life insurance companies can only pay the proceeds to those listed as beneficiaries since the life insurance policy is a legal contract. Policyowners can name anyone as a beneficiary, from their spouse or ex-spouse to children, siblings, parents, business partners, a charitable organization, or a trust.

Policyowners may also designate a contingent beneficiary. This person or entity is a secondary recipient of the life insurance policy payout. The contingent beneficiary will receive the death benefit if the primary beneficiary dies or cannot be found before the policy pays out.

Beneficiary designations need to be very clear and follow the requirements of the life insurance policy. When no beneficiary is named on the policy, the life insurance proceeds will go to the estate or be distributed to the next of kin. You will receive the full death benefit if you are the sole beneficiary. If there are multiple beneficiaries, each will get their allocated share.

An improper beneficiary designation or change can lead to beneficiary disputes which will cause payout delays. Contesting a beneficiary designation is too complex and stressful to go through without an attorney, especially while you are grieving the loss of your loved one. In such cases, you need the assistance of an experienced life insurance lawyer who can guide you through the process.

Are Life Insurance Payouts Taxable?

Generally, life insurance benefits are not taxable. That means if you opt to receive the policy proceeds in a single payment, it is unlikely you will owe taxes. However, any interest earned on the death benefit amount is taxable. So if you decide to receive the payout in installments, taxes are expected to be paid on some of that income. This also applies to estate taxes. If the insured’s estate is named beneficiary, the individual who inherits the estate may have to pay taxes.

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

Life insurance benefits should be paid in a timely manner. Every delay or denial should be reviewed by an experienced life insurance attorney and contested if a claim appears wrongfully delayed or denied.

We are here to help and advise you of the best course of action. We offer free consultations and work on a contingency fee, which means there is no legal fee unless you win and receive your life insurance payout. If you or someone you know has issues with a denied life insurance claim, call us at (888) 510-2212 to speak with one of our life insurance attorneys.

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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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