How Do Life Insurance Payouts Work?

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With a life insurance policy, the insured can provide their loved ones with financial safety as well as peace of mind when they’ve passed away. These life insurance policies mean that the policy owner, if they are also the beneficiary,  can receive financial coverage that can help in paying out some of their final expenses, including medical exams, funeral costs, outstanding debts, and even other types of costs associated with long-term care should that be necessary.

If someone has a life insurance policy before they pass away, that means that the life insurance beneficiaries are going to get death benefits. The family members included in the life insurance policy can decide on their own whether they want to receive a string of payments over a period of time, a lump sum of money, or put everything in an interest-earning account. That all depends on the personal finance choices of the beneficiaries.

 

The way that life insurance policies work is fairly simple: the policy owner is keeping up with the policy’s premium payments, purchasing some form of coverage. In cases when the insured passes away during the life insurance policy, the beneficiaries, typically family members,  receive the death benefit payout as the coverage amount from the life insurance company.

Different Types of Life Insurance Policies

There are two main categories of permanent life insurance policies, and there is a single difference between them. The difference between both categories of life insurance is that with one of the types, you‘re able to accrue a cash value while you’re making the premium payments, and that cash value can be used in various ways for the rest of your life.

Term Life Insurance Policies

If you’re looking to get a certain type of coverage over a certain period of time, it’s best to go with a term life insurance policy. They can last anywhere between one and thirty years, and have static premium payments. That means the price of the premiums isn’t going to increase with inflation throughout the duration of the insurance policy, and when you pass away, your beneficiary family members will get death benefits.

 

The downside to term life insurance policies is that despite making all the premium payments, it’s not going to accumulate any cash value. Additionally, the only way for your beneficiaries to receive the life insurance death benefit is if you still have coverage when you pass away.

Whole Life Insurance Policies

One of the most common kinds of life insurance policies is the whole life insurance ones, which build up cash value throughout your life. And then, with the accumulated cash value amount, you can either borrow from the insurance company, withdraw your funds, or even exchange that value for increased death benefits for your beneficiaries.

 

However, the downside to making any sort of withdrawal is your loved ones may receive a smaller amount for the death benefits. 

Who Needs Life Insurance

Deciding if you do or don’t need any type of life insurance mainly depends on the state of your health and your overall situation in life. People who don’t have anyone depending on their income, and who have enough in savings that they’ll be able to pay for their own expenses once they’ve passed away don’t really need a permanent life insurance policy.

 

However, the people who want to ensure a loved one’s financial security or have someone depending on their income for their survival means that they have dependents who can be classified as primary beneficiaries for the life insurance policy. They can look into getting some type of insurance product to protect the family.  For example, if you’re the main person at home who does most of the housekeeping and child care tasks, or if you’re a stay at home parent or the only one earning a living wage in your home, insurance can provide such financial protection.

 

Additionally, if you provide any type of financial support for a spouse or aging parents, this may also be a reason to look  into getting some type of life insurance coverage.

Types of Payouts for Life Insurance Policies

For the beneficiary family members to be able to collect any death benefits, they first have to fill out a claim form. That form, as well as a certified copy of the death certificate, is sent to the insurance company, which is able to process everything in a few weeks. After the claims process is finished by the insurance agent, the insurer can then give the death benefits to the family members according to how they decided to receive them.

Annuity

One of the options for receiving a life insurance payout for beneficiaries is in annuity, which is also called a life income payout. This option allows the beneficiary family members to get a number of payments throughout their lives. However, to determine the death benefit amount and the number of payments, the insurer needs the age of the beneficiaries.

 

If any beneficiary passes away before they receive all of the death benefits, then any of the life insurance death benefits remaining goes back to the insurance company unless there is a set period of time for that annuity. In that case, all leftover amounts of the death benefits will be forwarded to the beneficiaries.

Specific Income Payout

This is another type of payout that also allows family members to get a set of installment payments every month over a certain time period. It’s also a great way for families that work with financial advisors to make sure none of their death benefits diminish too fast. When this option is chosen, all of the money from the death benefits is put into an account that earns interest by the insurance company.

 

However, you should know that the interest amount that’s earned on the balance is subject to income tax.

Retained Asset Account

With this option, the insurance company puts the death benefits into an account that accrues interest, and gives a checkbook to the family members who want to access it. With this option, the insurance company can guarantee any amount of accrued balance in that account, however, the interest, like the previous option, is subject to income tax.

Lump-Sum Payout

This last option is the most common for many, where the beneficiaries will receive the entire death benefits in a single lump sum. However, if the family members don’t manage that money well ( generally by working with a financial planner) it can quickly be depleted.

 

Furthermore, with this option, bank account balances in the US are only protected by the Federal Deposit Insurance Corporation until they accrue to $250,000. If the death benefits go over that amount, it means the beneficiaries will have to have several different accounts to be able to store the payout.

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Frequently Asked Questions About Life Insurance Payouts

Can an insured have multiple beneficiaries?

A policy owner only needs to add one primary beneficiary to their life insurance policy, but multiple beneficiaries are permitted. And, if they see fit, they can also add a contingent beneficiary for the death benefits.

Are there any other documents that the insurance company needs?

Most of the time, insurance companies only need the beneficiary family members to file a death claim and send the death certificate, but there are some that also ask for a benefits claim aside from those documents.

Are there situations where family members can’t get any death benefits?

If a policyholder ends up passing away during the contestability period, typically within the first two years, the insurance company can review and potentially contest the claim based upon things like misrepresentations on the application.


Additionally, if there are any additional questions about the insured’s death or the cause of death, the death benefits can be further delayed, or even completely suspended, and the insurance company can launch an investigation into the matters.

Don’t lose your lifelong investment. Discover your policy’s value today.