How Is Life Insurance Paid Out?

Life insurance provides money to your loved ones in the event of your death. You can opt for term life, which lasts for a set period, or whole life, which builds up a cash value and remains in place until you die. No matter which type you choose, your beneficiaries can receive a death benefit if you die. Understanding how life insurance is paid out can help you explain the procedure to your beneficiaries so that they can easily file a claim in the future.

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How Is Life Insurance Paid Out?

Each life insurance company establishes its own procedure for paying out death benefits. However, the process usually involves the following steps.

Your beneficiaries get an official copy of your death certificate.
Your beneficiaries file and submit a claim by filling out documents provided by the life insurance company.
The life insurance company reviews the claim. Beneficiaries may be asked to provide additional information.
The life insurance company approves or denies the claim. If approved, the payout is distributed. If the claim is denied, the insurance company must explain why and tell the beneficiaries how to file an appeal.

Is Life Insurance Paid Out in a Lump Sum?

Beneficiaries have the option to choose from a variety of payout options on an approved claim.

Lump Sum

With a lump sum, the beneficiary receives the full death benefit in a single payment. If the payout is more than $250,000, distributing the funds between multiple banks is wise. The Federal Deposit Insurance Corporation (FDIC) won't guarantee funds over that limit with deposit insurance. The Internal Revenue Service (IRS) doesn't consider lump sum payments income. Usually, beneficiaries won't have to pay taxes on the money.

Specific Income

A beneficiary may opt to receive equal monthly installment payments for a set period to simplify money management and ensure that the insurance proceeds last. Funds are kept in an interest-bearing account. The actual death benefit is distributed tax-free, but interest earned is usually subject to income tax.

Retained Asset Account

With this payout option, the life insurance company places the money in an interest-bearing account and guarantees the full amount, even if it exceeds $250,000. The beneficiary gets a checkbook to access funds as needed. Normally, interest earned on a retained asset account must be claimed on income tax.

Annuity

This payout option gives the beneficiary an income for the rest of their lives. The amount that they receive annually depends on the size of the death benefit and their age. Any money remaining in the account when the beneficiary dies is usually turned over to the insurance company. Some insurers will issue an annuity for a specific number of years. Under this arrangement, any money left at the time of death is passed on to named beneficiaries.

How Long Does It Take to Get a Life Insurance Payout?

Most life insurance claims take 30 to 60 days to process. Generally, more complex payouts take longer. Issues that can delay a payout include:

Difficulty identifying or locating beneficiaries
Multiple beneficiaries on one policy
Death of primary beneficiaries
Errors on a claim form
Someone contesting one or more of the beneficiaries
Cause of death is suicide or murder

Do All Beneficiaries Need to Choose the Same Payout Method?

No, each beneficiary can usually choose from the available payout options. On a policy with two beneficiaries, one may get a lump sum while the other chooses a specific income payout.

How Is a Life Insurance Death Benefit Split?

When you take out a life insurance policy, you can designate a percentage for each beneficiary to receive. If you don't, the life insurance company will usually split the payout equally.

What Can I Do to Ensure My Life Insurance Is Paid Out Quickly?

The speed of a life insurance payout is mostly out of your control. However, doing the following may reduce unnecessary delays:

Be honest on your application. Making false statements on a life insurance application won't just slow down the payout; it will usually lead to a complete denial of claims. If your deception is discovered before you die, the policy could be canceled, and you may potentially face legal consequences under insurance fraud laws.
Clearly identify your beneficiaries. Don't simply write "spouse" or "child." Include full names, Social Security numbers and current mailing addresses.
Keep your beneficiaries up to date. Contact the insurance company if one of your beneficiaries changes their name, moves or passes away. You can usually add and remove beneficiaries at any time.
Don't make your estate a beneficiary. While it's possible to make your life insurance death benefit part of your estate, doing so can slow down the payout process. Your estate could go through the lengthy process of probate before funds are distributed. If you have a large estate, the death benefit could be subject to inheritance tax, reducing how much your heirs receive.