Life insurance can be an important part of an estate plan and can help you secure a legacy for those you love. You may purchase a policy when you are young and not think about it for decades, but the time may come when the policy’s proceeds will be paid out to your beneficiaries.


In this article, we’ll take a close look at life insurance payout options, the claims process, and choosing your beneficiaries. Understanding these aspects of life insurance can help you make the best choice when you are purchasing a policy – or if you are a beneficiary on a loved one’s policy.


How Does Life Insurance Pay Out?


When you die, your beneficiary or beneficiaries – the person or persons you have designated as the recipients of your policy’s payout – must file a claim with the life insurance company that holds your policy. Once approved, the beneficiary can choose how they’d like to receive their life insurance payout, which is called the death benefit. The options can differ between carriers, but the most common ones across the industry include:


  • Lump sum payment. This is a common choice, especially when multiple beneficiaries are designated. Your beneficiaries will receive a single payment that includes the entire death benefit. 
  • Specific income payout. In this scenario, the death benefit will be placed by the insurer into an interest-bearing account, and beneficiaries receive monthly or annual payments of an amount they choose. The interest on the account is taxable. 
  • Lifetime annuity. This is a guaranteed recurring payout from the insurer over the rest of the beneficiary’s life. The amount of the payout will be determined by the age of the beneficiary – if they die while there is still money in the account, it reverts back to the insurer.
  • Fixed period annuity. The insurance company will issue regular payments to the beneficiary over a period of time, such as 10 or 20 years. The payout is calculated by dividing the death benefit by the number of years chosen. The beneficiary will also choose their own beneficiary(ies) to receive any remaining payments if they were to pass away before the time period ends.
  • Retained asset account: The insurer keeps the money in an interest-bearing account, and the beneficiary can write checks against it as needed.


Who chooses the payout option?

Whether the insured or the beneficiary chooses the payout option depends on the life insurance company and policy. Some insurance companies may allow the insured or policyholder, who may be different individuals, to indicate how they want the death benefit to be paid out upon setting up the policy. However, in most circumstances, the beneficiary chooses how to receive the payout after they file a claim and the insurer approves it. This allows the beneficiary to determine which scenario works best for their needs.


When is the payout option chosen?  

In general, the payout option is chosen when the claim is filed by the beneficiary and approved by the insurance company. However, as noted above, the option may be selected when the policy is purchased if allowed by the specific carrier. When setting up your life insurance, make sure you and your beneficiary understand the options available and the payout process.


How Do You Claim a Life Insurance Benefit?


Although there may be minor differences between insurers, there are generally several steps to claiming life insurance benefits:


  1. Collect certified copies of the deceased’s death certificate. These can usually be obtained from the funeral parlor or mortuary. If it’s been a while since the death, contact your county’s or state’s vital records department to ask for them. It may be helpful to have multiple copies on hand. 
  2. Gather policy information. This can include the life insurance policy number and personal information for the insured and beneficiaries, such as addresses, birth dates, and Social Security numbers. You may also need a copy of the policy itself. If you are unable to locate the policy’s information, the National Association of Insurance Commissioners (NAIC) has a policy locator that can help.
  3. Fill out the forms. Some insurance companies have claims forms available online while others require you to call to request them. There is usually no time limit by which the claim must be filed, but you should confirm this with the insurance agent or company to ensure you meet the proper requirements.
  4. Submit the forms. You can submit all documents online, via fax, or by mail, depending on the insurer’s requirements. Note that if there are multiple beneficiaries, each one will need to submit their own claim forms.
  5. Wait for the claim to be approved. The insurance company will contact you if it needs more information to process your claim and when it reaches a settlement decision. You may be able to track the status of the claim online or via a phone call to the insurer. If the claim is approved, the insurer will issue the death benefit based on the payment option you selected.


How Long Does Life Insurance Take To Pay Out?


How long life insurance takes to pay out depends on various factors, like the timeliness and accuracy of the claim submission and the cause of the insured’s death. However, each state has laws mandating life insurance payout timelines – typically 30 to 60 days after receiving all claim documents – and may invoke penalties for delays, usually in the form of interest. Insurance companies are therefore incentivized to review your claim and issue your payout as quickly as possible. For example, New York requires insurers to pay accrued interest on the death benefit from the date of death, while Alaska’s law requires insurers to pay claims within two months. Ask the insurance agent or company when you can expect to receive the death benefit after filing the claim.


Despite state laws, life insurance payouts may be delayed. Continue reading to learn why.


What Can Delay An Insurance Policy Payout?


There are a few common reasons why a policy payout might be delayed:


  • Missing information. If the insurer is missing a death certificate or beneficiary contact information or if the claim forms are not filled out correctly, then it may take longer to process the claim.
  • The policy’s age. Most insurers will investigate the claim if the death occurs within two years after the policy was purchased, which is called the contestability period. This is to help prevent fraudulent claims. 
  • Cause of death. Some causes of death, such as suicide, drug or alcohol abuse, or as a result of a highly dangerous activity like skydiving, may be excluded from coverage under your life insurance policy and may require further investigation.
  • Misrepresentation. If you lie on your life insurance application or fail to disclose important information like pre-existing conditions, the insurance company can void your policy and deny submitted claims. An investigation of potential fraud can delay the settlement and payout.


Do Beneficiaries Pay Tax on Life Insurance Payouts?


The death benefit from a life insurance policy is not considered taxable income by the IRS. However, any interest that is earned by the payout is taxable. Therefore, if you choose a retained asset account or other interest-earning vehicles as your payout option, you may find yourself with a tax bill.


If the life insurance beneficiary is the estate of the deceased person, there could also be tax ramifications. Estates are taxed when they are more than $12.06 million, as of 2022, and if the death benefit of a life insurance policy pushes an estate over that amount, it could be costly.


Can There Be Multiple Beneficiaries?


Yes, you can designate multiple beneficiaries when you purchase your life insurance policy. When doing so, you will assign each beneficiary a percentage of the death benefit. For example, you could name your two children as equal beneficiaries with 50% allocated to each.


You may also choose a secondary beneficiary, called a contingent beneficiary. If the primary beneficiary has died or cannot be located, the contingent beneficiary or beneficiaries will receive the payout based on the percentage you assigned. For instance, you could name your spouse as the primary beneficiary with 100% allocation and your two children as contingent beneficiaries with 50% each.


What Happens To A Life Insurance Policy Without A Beneficiary?


In most cases, you are required to name a beneficiary or beneficiaries when you purchase the policy. However, there can be cases where no beneficiary is available when the time comes to pay out on the policy. The most common instance is when the beneficiary dies before the insured. In this case, if there’s more than one beneficiary, the payout will be distributed on a per capita or per stirpes basis, depending on the policy and state laws. Under a per capita distribution, the death benefit will be divided between the remaining beneficiaries, and under per stirpes, the deceased beneficiary’s portion can be collected by their heirs or estate. If there are no other primary beneficiaries, any contingent beneficiaries will benefit.


When the insured and the beneficiary die at the same time – or within 24 hours of one another – the insurance company will work to determine who passed away first. If it was the beneficiary, then any remaining primary beneficiaries or the contingent beneficiaries will claim the payout. If the insured passes first, then the beneficiary’s heirs or estate will receive the death benefit.


If there are no beneficiaries left alive at the insured’s death, the death benefit will be added to the insured person’s estate. This could have tax consequences, and if there is no will or trust, the estate may be subject to probate.


Can A Life Insurance Beneficiary Be A Minor?


Naming a child as a beneficiary can be a great way to ensure their needs are met, but there are a few things to take into consideration. Minor children cannot directly receive an insurance payout, so you need to take additional steps if you choose to name a young child as the primary beneficiary. One common way of handling it is to appoint a legal custodian for your child. This person is responsible for managing the payout until it can be legally transferred to the child.


You may also set up a trust, naming an adult to manage it until the child is of age. The trust can be either revocable, also called a living trust, which allows you to make changes if circumstances change, or irrevocable, which means no changes can be made without the beneficiary’s permission. If you wish to pursue this route, contact an estate planning attorney.


Can A Life Insurance Beneficiary Be Changed?


As you go through life, you’ll undoubtedly experience changes, such as marriage or the birth of a child, that may impact your choice of beneficiary. In most cases, you can change your beneficiary. The policy owner will need to contact the insurance company to request the required forms – or they may be accessible online. Fill out the forms and submit them to your insurer to change your beneficiary.


However, if you named someone as an irrevocable beneficiary when you purchased the policy, then you will need their permission to make any changes.



Author: Mary Van Keuren

Source: © 2022 News and World Report

Retrieved from: usnews.com

FINRA Compliance Reviewed by Red Oak: 2565127