Thinking about dying or taking care of your final arrangements isn’t exactly the most pleasant of topics, but if you have loved ones or children who rely on you financially, then it’s likely something you have already considered. How the special people in your life are taken care of after your passing is important, and having a solid life insurance policy should be part of everyone’s long-term financial planning. Life insurance pays out death benefits for those whom you name beneficiaries on your policy, but in order to select the best plan for you and your loved ones, it is extremely important that you fully understand how your life insurance policy will pay out upon your passing.
Receiving payment from your life insurance typically involves your beneficiaries filing a claim and then waiting up to 30 to 60 days for the insurance company to pay out. Your beneficiaries may get to choose from different payment options.
How Life Insurance Works
In its simplest form, life insurance is a contractual insurance product that pays out death benefits to your beneficiaries upon your passing. The two main types of life insurance policies are whole (also known as permanent) and term. Whole life policies cover you for the rest of your life and are designed to pay out guaranteed benefits to your beneficiaries, as long as the policy is still “in force” and hasn’t lapsed.
Term life insurance policies, on the other hand, will pay benefits if you die within a certain time frame set forth in your policy. Term policies generally range from 10 to 30 years in length, and should you die after the time covered by your policy, then your beneficiaries will receive no payouts or death benefits. However, if you do happen to pass within the terms of your contract, then your benefits will pay out just as with a whole life policy – as long as the policy is also in force at the time of your death.
In order for your policy to remain in force or in effect, you must pay the insurance company what are known as premiums. The amount of your insurance premium can be either guaranteed or variable, so it is imperative to find out what you can expect before you settle on a particular a policy. If your premium becomes unaffordable, you may be more likely to let the policy lapse and lose the protection it provides.
What Does Life Insurance Cover?
When you die, your life insurance company will review the claim and pay out to your beneficiaries – given that none of the rules of your policy were broken. In cases of suspected fraud or any misrepresentation the insurance company finds with the policy, then your beneficiary’s claim will be investigated and likely denied. Life insurance also is not a policy that protects you or pays out benefits in the case of extreme injury or illness. There are, however, additional insurance riders that can be purchased, which will provide for some care during terminal illness, but these are usually not part of a standard policy.
While your life insurance can cover your final arrangements like funeral costs and paying off debts such as mortgages or co-signed debts, the beneficiary can also use the payout to help take care of personal bills, household expenses, college tuition or any number of things that would put undue burden on your family and loved ones in the event of your passing. How much the payout is depends upon how much coverage you choose. Be mindful that you’re not underinsured – you want those you leave behind to have enough money leftover after taking care of your final expenses to maintain their lifestyle, at least for a while, in your absence.
Life Insurance Payout to Beneficiaries
Today, with life insurance, upon the death of the insured, a lump sum payment or installments are paid to the beneficiaries, but you didn't always have both options. Historically, when you died, your beneficiaries would receive the entire payout of your policy all at once. And, even though lump-sum payouts remain the most popular method of life insurance benefits dispersal, life insurance policies are now more flexible and offer policyholders a few different payout options.
Of the available payout options, installment payouts as well as annuities are also popular. Depending on the extent of coverage, these installment or annuity payments can continue throughout the beneficiary’s lifetime. However, you can also select the duration of how long you’d like these installment payments to last, generally from anywhere between five and 40 years.
When Does Life Insurance Pay?
Typically, when you die, your beneficiary takes your death certificate and will make a claim to your life insurance company to collect her benefits. Depending on the state in which you live, the insurance company typically has 30 days to review the claim and accept it. The insurance provider also has the right to request that your beneficiary provide supplemental or additional information in order to approve the claim and pay out any benefits.
If there are no hang-ups regarding your policy or suspicion of fraud, life insurance benefits paid to beneficiaries are usually dispersed within 30 to 60 days from the date the claim was made. In the event an insurance company takes too long to pay, it faces hefty interest charges, so it is in its best interest to get all valid claims paid out as soon as possible.
What Could Cause a Delay?
Although the time frame allowed for an insurance company to pay on a claim isn’t set in stone – and does vary – if your beneficiary doesn’t receive the supplemental or additional information request, then the payouts may be delayed. Delays in life insurance payouts can stem from a number of reasons, most commonly in cases of suspected fraud or in cases of homicide where the beneficiary is a suspect in your death.
Many life insurance policies also contain what is known as a contestability clause. This clause stipulates that if you die within two years of obtaining the policy, the insurance company reserves the right to review your application to make sure that no fraud was committed or that you had no undisclosed underlying conditions.
If you die within this two year period, then the insurance company will likely investigate and pay out (or not) accordingly. It’s worth noting, however, that if the investigation shows that you did in fact lie on your application, the insurance company can decide not to pay out the claim. This applies even if your cause of death had nothing to do with what you misrepresented on your application. For example, if you die in a workplace accident, but it was determined that you were a smoker and did not disclose or lied about this on your application, the insurance company can deny the claim on the grounds of misrepresentation.
Avoiding Problems With Claims
Making an unintentional mistake during the application process doesn’t mean that your claim will automatically be denied during the contestability period. Depending upon how egregious the mistake or misrepresentation is, or how much your policy is for, the claim can still be approved. However, it is best to be completely honest when you go to fill out the application, or your loved ones could be in for an uphill battle.
- How Does Life Insurance Work? – Forbes Advisor
- Policy Genius: What Does Life Insurance Cover?
- Insure.com: The Life Insurance 'Contestability Period' – 7 Things to Know
- AAA Northeast: Life Insurance Payouts and You: The Facts You Need to Know
- TopQuote Life Insurance: Life Insurance Payout After Death: Claim Process & Timeline
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.