Life Insurance Payout
Life insurance payout options determine how your death benefit is paid after you die. Payout types include installments and annuities, lump-sum payments or a retained asset account. The type of payout depends on the life insurance policy. Interest you receive from a life insurance payout is taxable.
How to File a Life Insurance Claim
Insurance claims don’t happen automatically with the death of the insured. A beneficiary of the policy will need to file a life insurance claim. It is relatively simple, but the beneficiary will need a few documents to file the claim.
- Death Certificate of the Insured
- The funeral director of the insured can provide a certified copy.
- Copy of the Life Insurance Policy
- The policy number and beneficiary information can speed the process.
- Insurer’s Claim Form
- Most can be filled out online, but some insurers require people to print out a copy and mail it to the company.
It is important to notify the insurance company as soon as possible after the insured’s death because processing the claim and making a payout can take several weeks.
When Are Life Insurance Benefits Paid?
Most life insurance claims are paid out within 30 to 60 days after filing a claim, but there can be delays. In many states, insurers are allowed 30 days to review the claim before making a payout, denying the claim or asking for more information before making a decision.
Insurance companies are motivated to make payouts quickly after receiving a claim and proof of death because they can face high interest payments to the beneficiary the longer they delay the payout.
Certain situations, usually involving the cause or circumstances of the insured’s death, can delay life insurance payouts.
Most policies allow the insurer to investigate the death to make sure there has been no insurance fraud.
- Death During Contestability Period
- This is a one or two-year period after the policy is first purchased and there may be a delay.
- Death by Murder
- A delay is possible while the insurer determines that no beneficiary is a suspect in the homicide.
- Suicide During Contestability Period
- A payout may be denied if the insured commits suicide shortly after buying a life insurance policy.
- Death by High-Risk Activity
- If the insured has a risky hobby that was never mentioned in the policy application, payout may be denied.
- Death During Illegal Activity
- A payout may be denied if the insured was committing a crime or driving under the influence.
- Lying on the Original Application
- Payouts can be denied if the insured lied about health or other risks to his or her life when buying the policy.
If the insured died during the contestability period, insurance companies may also delay payouts for six to 12 months.
Types of Insurance Payouts
In most cases, beneficiaries choose the type of life insurance payout after the insured dies. Payout options include lump-sum payments, installments and annuities and a retained asset account.
Lump-sum payments are the most common type of life insurance payouts. It is a large sum of money, paid out all at once instead of being broken up into installments.
A lump-sum payment gives beneficiaries immediate access to the money, providing financial security quickly. The money can be applied to the cost of a funeral and burial as well as paying medical and other bills.
Lump-sum payouts are also tax free unless you allow it to sit in an account and accrue interest.
Installments and Annuities
Installment payments and annuities are two more payout options to consider if a lump-sum payment would be problematic.
Installment payments are unlike other options because the insured chooses this option instead of the beneficiaries.
They can spread the payments out over anywhere from five to 40 years with the bulk of the death benefit accruing interest until it is all paid out. This allows the insured to guarantee an income stream for his or her beneficiaries.
Annuities are a type of financial instrument that pays a fixed income over a specified period of time. A beneficiary can choose to take some or all of a lump-sum payment and buy an annuity. This provides an income stream to the beneficiary for the term of the annuity.
As a beneficiary, you would decide if you want an annuity to provide you with payments for a fixed number of years or for the rest of your life.
A fixed-period annuity, also called a period-certain annuity, condenses the payouts over a fixed number of years. If the beneficiary dies, his or her beneficiary will receive any remaining payments until the fixed number of years expires.
A lifetime annuity pays out a percentage of the death benefit plus interest every year for the rest of your life.
Retained Asset Account
Retained asset accounts are a type of checking account run by the insurance company that pays out the death benefit.
The money is kept in the retained asset account and the beneficiary receives a payout checkbook. The beneficiary writes checks on the account as money is needed. There are no penalties or limits on how much money the beneficiary may withdraw from the account.
The account accrues interest as long as it remains open.
Other Payout Types
There are several other options for choosing a life insurance payout that may be more suitable for different people.
- Interest Income
- The insurance company keeps the death benefit but pays the interest it accrues to the beneficiary for the rest of his or her life or a fixed time period.
- Life Income
- The insurer calculates a fixed, guaranteed monthly income for life based on the beneficiary’s age and gender.
- Life Income with Period Certain
- Similar calculation to life income, but with a specific number of years.
- Specific Income
- Allows annual payout of a fixed amount as extra income for the beneficiary.
Is a Life Insurance Payout Taxable?
Death benefits are generally not considered gross income so you do not have to report them to the Internal Revenue Service. But any interest you receive on the death benefit is taxable and you must report it as interest income, according to the IRS.
Since life insurance payouts usually involve large sums of money, the interest can accrue quickly. This is something to consider when choosing what type of payout you choose to receive since many of them involve interest payments.
3 Cited Research Articles
- U.S. Internal Revenue Service. (2019, November 25). Life Insurance and Disability Insurance Proceeds. Retrieved from https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
- Yaniz Jr., R. (2018, August 21). Life Insurance Payouts and You: The Facts You Need to Know. Retrieved from https://magazine.northeast.aaa.com/daily/money/life-insurance/life-insurance-payouts-facts-need-know/
- Insurance Information Institute. (n.d.). Life insurance payouts. Retrieved from https://www.iii.org/publications/a-firm-foundation-how-insurance-supports-the-economy/supporting-businesses-workers-communities/life-insurance-payouts