Life Insurance: A Check Can Get You Covered

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. There are several kinds of life insurance, including term and permanent plans. The death benefit is the money – lump sum or otherwise – that gets paid to your beneficiaries if you die while your life insurance policy is in effect.

When it comes to receiving the death benefit, there are different ways a beneficiary may receive a life insurance payout, including lump-sum payments, installment payments, annuities, and retained asset accounts.

Who can be a beneficiary?

When purchasing a life insurance policy, you must name a beneficiary (or multiple beneficiaries) who will receive the payout in the event of your death. A beneficiary can be a person, people, or an organisation. Here are some examples:

• A person, such as your spouse
• Multiple people, like your children
• A charitable organisation
• A legal entity, like your company

In some cases, you may need permission from your spouse to name someone else as a beneficiary. Additionally, minor children cannot ordinarily be named as beneficiaries, and a legal guardian or trust must be appointed to manage the funds.

When choosing a beneficiary, it is important to be as specific as possible. Instead of writing "my children", list the name and Social Security number of each beneficiary to prevent confusion and speed up the payout process.

You can also choose to have both primary and contingent beneficiaries. Primary beneficiaries are the first in line to receive the death benefit, while contingent beneficiaries will receive the benefit if the primary beneficiary is no longer alive.

It is worth noting that the beneficiaries you choose must have an "insurable interest" in your life, meaning they have more to lose than gain by your death, financially or otherwise.

Different types of beneficiaries

There are two types of beneficiaries: irrevocable and revocable. Irrevocable beneficiaries cannot be changed without the beneficiary's approval, while revocable beneficiaries can be changed, updated, added, or removed at any time.

Choosing a beneficiary

When choosing a beneficiary, consider why you have life insurance in the first place. Ask yourself:

• Who relies on you financially and would need help with bills if you were to pass away?
• Who would need financial support to cover costs such as funeral expenses?
• Who would you like to leave money to, regardless of whether they rely on you financially?

It is recommended to review your life insurance policy and its beneficiaries annually or after any major life event, such as marriage, birth, divorce, or death.

How to file a claim

How to File a Life Insurance Claim

The death of a loved one is a difficult time, and filing a life insurance claim can be a confusing process. Here is a step-by-step guide to help you navigate the process and receive the benefits you are entitled to.

Step 1: Contact the Insurance Company

Get in touch with the insurance company or agent as soon as possible. The name of the insurance company will be clearly stated on the policy. If you remember the agent you or your loved one worked with, ask for them specifically. They should be able to explain their process for filing a claim.

Step 2: Obtain Death Certificates

Make sure you get certified copies of the death certificate from the funeral director. Most insurance companies will not accept photocopies. It is recommended to get at least 10 certified copies, as you will need them for various administrative tasks, such as cancelling subscriptions and closing accounts.

Step 3: Gather Supporting Documents

If your loved one died in an accident, collect any relevant supporting documents, such as a copy of the autopsy, toxicology, or police report. These documents may be required by the insurance company to process your claim.

Step 4: Fill Out and Submit Paperwork

Most insurance companies make their claim forms available online. If not, call the insurance company or agent to find out the necessary steps. Fill out the paperwork as thoroughly and honestly as possible. You will likely need to provide basic information such as your full name, address, date of birth, Social Security number, and your relationship to the policyholder. You may also need to specify how you would like to receive the payout.

Step 5: Wait for the Payout

In most cases, insurance companies will pay out the claim within a week or two of receiving the completed paperwork. However, depending on the state you live in, an insurance company may have up to 30 days to review and accept or reject the claim. There may be delays in the payout if the insured person died within two years of taking out the policy, as this is considered the "contestability period" during which insurers have the right to investigate the claim.

Receiving the Payout

There are two main ways to receive the life insurance death benefit:

• Lump Sum: You can request a check for the full amount. The insurer may also offer a draft account, known as a "retained asset account," which functions like a checking account. Generally, life insurance payouts are not subject to income tax.
• Installments: The insurer will hold the money and may offer various options, such as interest payments, fixed periods, fixed amounts, or converting the payout into an annuity for regular payments over your lifetime. However, any interest earned during this time may be subject to taxation.

Remember, if there are multiple beneficiaries, each person must typically submit their own claims packet, and the insurance company will assess and pay out the claims individually.

Finding a Lost Policy

If you are unsure whether you are a beneficiary or are having trouble locating the policy, there are a few ways to find a lost life insurance policy. You can try using policy locator tools or checking with unclaimed property programs. You can also contact the agent who sold the policy or your loved one's financial advisor for assistance.

Payout options

When purchasing life insurance, it's important to understand how it works and how your beneficiaries can receive the proceeds of your policy. Learning about the process helps you choose the right payout option to meet your goals.

There are several ways a beneficiary may receive a life insurance payout, including:

• Lump-sum payments: This is the most common and default option, where the beneficiary gets a large amount of cash all at once. They can use the money as they please, but it's recommended to consult a financial professional to make the most of the money.
• Installment payments: The insurance company pays the beneficiary a certain amount of money on a regular schedule (monthly, quarterly, or yearly) over a certain period. However, if the beneficiary passes away before the entire payout is received, the remaining money goes back to the insurance company.
• Annuities: The proceeds and accumulated interest are paid out regularly over the life of the beneficiary. This option gives the policy owner the opportunity to select a pre-determined, guaranteed income stream of between five and 40 years.
• Retained asset accounts: The beneficiary receives cash advances against the death benefit before the insured person passes away. This is known as an accelerated death benefit or living benefit and is provided through accelerated benefit riders.

It's important to note that any interest income received by the beneficiary from an annuity or installment plan is subject to taxation. Therefore, beneficiaries may end up better off with a lump-sum payment, as they'll pay more in taxes on the interest if the death benefit is high.

How long does it take to be distributed?

The time it takes to receive a life insurance payout depends on several factors, including the insurance company, state laws, the documentation required, and whether the insured died within the first two years of the policy being issued. Most insurers pay out claims within 30 to 60 days of receiving the required documents, but this can vary depending on the specific circumstances.

The payout process typically involves several steps:

Submission of a Claim

Firstly, someone associated with the policyholder, usually the beneficiary, needs to notify the insurance company of the policyholder's death and submit a claim. This can often be done online, and the person filing the claim will need to provide a copy of the death certificate.

Review of Documentation

The insurance company will then review the claim and may request additional documents, such as a death certificate, completed claim forms, proof of identity, and guardianship documents if the beneficiary is a minor. It is important that all the required paperwork is in order to avoid delays in the payout process.

Verification and Investigation

The insurance company will verify the policy details, beneficiary information, and may conduct an investigation if necessary. They will evaluate the claim to ensure it is not fraudulent and confirm that the cause of death is covered by the policy. This investigation is more likely to occur if the insured died within the first two years of the policy being issued, known as the contestability period.

Processing the Claim

Once the claim is approved, the insurance company will process the payout. This typically takes 30 to 60 days but can be faster if all the required documentation is in order.

Disbursement

Finally, the life insurance proceeds are disbursed to the designated beneficiaries or the policyholder's estate. The beneficiary can usually choose to receive the payout as a lump sum or in installments over a fixed period or for the rest of their life.

It is important to note that there may be delays in the payout process due to incomplete or missing documentation, policy investigations, beneficiary disputes, or the complexity of the policy. However, most insurance companies work to expedite death claims and provide the payout as soon as possible.

What happens if your claim is denied?

If your life insurance claim is denied, the insurance company is required to provide a written explanation for their decision. After the rejection, the insurer may terminate the policy and return the premiums paid. If you believe that your claim should not have been denied, you can try to communicate with the insurance company and ask them to reconsider their decision after providing additional documentation that may have been missing from the original claim. If this does not work, you can file a consumer complaint with your state's department of insurance or seek the help of a life insurance attorney.

In most cases, life insurance claims are denied due to policy delinquency, material misrepresentation, contestable circumstances, or documentation failure. Policy delinquency occurs when a policyholder fails to pay their premiums on time, resulting in a lapse in coverage. Material misrepresentation refers to providing false or incomplete information on the insurance application, such as lying about medical history, occupation, or hobbies. Contestable circumstances involve deaths outside the scope of coverage, typically within the first two to three years of the policy's effective date, which includes suicide or dying while performing an illegal act. Documentation failure refers to the inability of the family or heirs to provide the necessary paperwork, such as a death certificate, to initiate the claim process.

It is important to understand the reasons for denial and gather any additional supporting documentation, such as medical records, autopsy reports, or insurance payment receipts, to strengthen your case. You can then decide whether to contest the denial by appealing to the insurer directly, seeking assistance from your state department of insurance or attorney general, or hiring a lawyer to make your appeal or prepare a lawsuit.

While it is uncommon for life insurance claims to be denied, it is crucial to be aware of the potential reasons for denial and take proactive steps to avoid claim denial. Being honest and forthcoming on insurance applications, keeping policies up-to-date, and automating premium payments can help ensure a smooth claims process for your beneficiaries.

Frequently asked questions