Life Insurance Payout

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.

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.

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.

If the insured died during the contestability period, insurance companies may also delay payouts for six to 12 months.

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.

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 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.

There are several other options for choosing a life insurance payout that may be more suitable for different people.

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.