Life Insurance: Payouts, Payments, And Your Money

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 can be used by the beneficiary in different ways, such as paying off a mortgage, saving for college tuition, or paying down consumer debt. The payout process begins when the beneficiary notifies the insurer, who will then review the claim and process the payout. The way the death benefit is distributed depends on how the policy was set up, with options including a lump sum, installment payments, or an annuity.

Choosing a life insurance beneficiary

Who Can Be a Life Insurance Beneficiary?

Almost anyone can be a life insurance beneficiary, including individuals, organisations, and trusts. Common examples include a spouse, children, a charitable organisation, or a legal entity like a company. Some insurers place limits on the number of beneficiaries you can name, so be selective if your policy has a limit. The beneficiaries must have an "insurable interest", meaning they would suffer more financially or otherwise by your death than they would gain.

Primary vs. Contingent Beneficiaries

Primary beneficiaries are the first in line to receive the death benefit if you die, while contingent or secondary beneficiaries receive the benefit if the primary beneficiary dies before you. You can have multiple primary and contingent beneficiaries and decide how much of the payout each party receives. For example, you could allocate 50% to your spouse, 30% to your child, and 20% to a charity. The percentages must add up to 100% and if you don't list them, the insurer may grant equal shares to each beneficiary.

Irrevocable vs. Revocable Beneficiaries

An irrevocable beneficiary designation cannot be changed without the beneficiary's approval and is therefore less common. However, it can be useful if you want to ensure that a specific person, such as your child, receives the benefit. On the other hand, a revocable beneficiary designation is flexible and can be changed, updated, or removed at any time.

Ask yourself why you have life insurance in the first place. Who relies on you financially and would need help with bills if you die? Who would need financial support to cover costs incurred by your death, such as funeral expenses? Who would you like to leave money to, regardless of whether they rely on you, such as a charity or a trust for your children?

Be as specific as possible when designating a beneficiary to avoid disputes. Include identifying factors such as the beneficiary's full name, Social Security number, relationship to you, date of birth, and address. Consult a legal professional to ensure you use the correct language.

Naming Children as Beneficiaries

Naming your children as beneficiaries may seem sensible, but if they are minors, the payout can be complicated. Many states allow legal guardians to receive payouts on their behalf, but appointing one can be a lengthy and expensive process, so consult a lawyer. Alternatively, you can set up a trust for your children and have a trustee oversee and distribute the funds according to your wishes.

Naming Your Estate as Your Beneficiary

Although life insurance proceeds are typically not taxable, the payout may be subject to estate tax if left as part of a large inheritance. Even with a will, your estate, including the death benefit, can get held up in probate court, delaying the payout. If you name a specific beneficiary on your policy, the funds go directly to them without being wrapped up in your estate.

If you don't name a beneficiary, the insurer typically issues the death benefit to your estate, and it becomes part of the estate probate process. Since probate can take months and creditors can come after the benefit, it is recommended to name beneficiaries and keep the list updated.

Changing, Adding, and Removing Beneficiaries

You can typically change, add, or remove revocable beneficiaries at any time, but the methods vary among insurers. Some companies may require a change of beneficiary form signed by a witness, while others allow you to update your beneficiary online. It is important to reassess your beneficiaries after major life changes to ensure the right people are protected.

Encouraging Beneficiaries to Learn How to Make a Claim

Not all states require insurers to notify beneficiaries of a death, so encourage your beneficiaries to learn how to make a life insurance claim. The National Association of Insurance Commissioners (NAIC) has a policy locator service to help beneficiaries find unclaimed policies.

Understanding the different types of life insurance

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 types of life insurance, including term and permanent plans. Here is a detailed overview of the different types of life insurance:

Term Life Insurance

Term life insurance provides coverage for a set number of years (e.g., 10, 15, 20, or 30 years). It is often the most accessible type of insurance to purchase, and you may not need a medical exam to get it. The premiums for term life insurance are usually more affordable compared to permanent life insurance. However, term life insurance does not contain a cash value component, and you cannot borrow money against the death benefit. Some term life insurance policies can be converted into whole or universal life policies, but the premiums will be much higher.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance that provides coverage for your entire life, as long as you keep paying the premiums. It also includes a savings component, known as the cash value, which grows over time on a tax-deferred basis. The cash value can be borrowed against, used to pay premiums, or withdrawn for retirement. Whole life insurance is generally more expensive than term life insurance due to the lifelong coverage and additional benefits it offers.

Universal Life Insurance

Universal life insurance is another type of permanent life insurance that offers lifelong coverage and a cash value component. However, unlike whole life insurance, universal life insurance provides flexibility in terms of premiums and death benefits. You can raise or lower the amount you pay into the policy, within certain limits. The cash value in a universal life policy may earn interest at a variable rate, depending on market conditions.

Variable Life Insurance

Variable life insurance is a riskier type of permanent life insurance. It consists of a fixed death benefit and a variable cash value that rises and falls based on the performance of selected investments. This type of policy provides more investment options but also carries higher risk, fees, and costs than whole or universal life insurance.

Final Expense Life Insurance

Also known as funeral or burial insurance, final expense insurance is a type of whole life insurance with a smaller death benefit designed to cover end-of-life expenses such as funeral costs and medical bills. It is often easier for older individuals or those with health issues to qualify for this type of insurance. Final expense insurance does not have the same cash value component as other types of whole life insurance.

Simplified Issue and Guaranteed Issue Life Insurance

These types of life insurance do not require a medical exam, making them suitable for older applicants or those with serious health problems. Simplified issue policies require filling out a health questionnaire, while guaranteed issue policies do not require any medical information. However, these policies typically offer lower coverage amounts and higher premiums due to the higher risk for the insurance company.

Group Life Insurance

Group life insurance is typically offered through an employer as part of an employee benefits package. It is usually term life insurance, but some companies also offer permanent coverage as an additional benefit. Group life insurance tends to have affordable premiums because it is purchased in bulk. However, the coverage amounts may be limited, and you may lose the policy if you leave your job.

How to file a life insurance claim

The death of a loved one is an emotional time, and filing a life insurance claim can feel like a daunting task. Here is a step-by-step guide to help you navigate the process:

Step 1: Contact the Insurance Company or Agent

Get in touch with the insurance company or your insurance agent as soon as possible. They will be able to explain their specific process for filing a claim. The name of the insurance company will be clearly stated on the life insurance policy. If you remember the agent you or your loved one worked with, ask for them by name. They can help guide you through the process and act as an intermediary with the insurance company.

Step 2: Obtain Multiple Copies of the Death Certificate

Make sure to get certified copies of the death certificate, usually from the funeral director. Photocopies are generally not accepted by insurance companies. It is recommended to get at least 10 certified copies, as you may need to submit proof of death to various entities during the estate disposition process.

Step 3: Identify the Insurance Policy and Beneficiaries

Determine which life insurance policy is in effect and the insurer you'll be filing a claim with. If you are unsure, check the deceased person's bank accounts and cancelled checks for payments to insurance companies. Go through safe deposit boxes, check with employers for group life insurance coverage, and review income tax records, which may indicate dividend income from a policy. You can also check with your state's Department of Insurance or use the National Association of Insurance Commissioners' Life Insurance Policy Locator Service.

Step 4: Fill Out the Necessary Paperwork

Most insurance companies make their claim forms available online. If not, contact the company or agent to find out what you need to do. They will likely ask you to send the death certificate and other required documents by mail. The insured's policy number, date of birth, full name, date of death, place of death, cause of death, and the name of the beneficiary will be required.

Step 5: Choose the Form of Payout

You will need to decide how you want to receive the payout. There are several options available, including:

• Lump sum: You receive the entire death benefit in one payment.
• Specific income: The insurer pays you the benefit on a predetermined schedule over a certain period.
• Life income: You receive a guaranteed income for life, with the amount depending on the benefit, your age, and gender.
• Interest income: The insurer holds the proceeds and pays you interest, with the death benefit going to a secondary beneficiary upon your death.

Once you have submitted the claim and chosen your payout option, the insurance company will review your claim. Depending on your state, they typically have up to 30 days to review and accept or reject the claim. Most companies will pay out the claim within a week or two of receiving the paperwork.

Remember, it is essential to provide accurate information when filing a life insurance claim. Knowingly submitting false or inaccurate information could lead to a claim denial or even criminal prosecution.

The life insurance payout process

Step 1: Contact the Insurance Company

As soon as possible after the policyholder's death, contact the insurance company to find out their procedure for filing a claim. There is no deadline for filing a life insurance claim, but it is wise to handle this as soon as possible.

Step 2: Submit the Necessary Documents

You will likely have to submit a certified copy of the death certificate and complete additional paperwork, such as a claim form. Your beneficiaries may also be required to provide a copy of the policy, along with the claims form.

Step 3: Wait for the Claim to Be Processed

The insurance company will review your claim and ensure they have all the necessary information. They will confirm that the policy was in force at the time of death and verify your identity as the beneficiary. If the insured died within two years of buying the policy, the insurance company may investigate the original application to ensure fraud was not committed.

Step 4: Receive the Payout

Life insurance death benefits are typically paid out as a lump sum, but some policies may offer other options like installment payments or an annuity. Most insurance companies pay within 30 to 60 days of the date of the claim, but there may be rare circumstances that result in delays.

What to do with a life insurance payout

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. The money from a life insurance payout can be used in a variety of ways, depending on your current expenses and financial goals. Here are some options for what to do with a life insurance payout:

• Pay off debt: If you have high-interest credit card debt or student loans, using the life insurance payout to pay off these debts can help reduce your monthly expenses and free up disposable income for other financial goals.
• Create an emergency fund: It is generally recommended to have three to six months' worth of living expenses set aside in an emergency fund. The life insurance payout can be used to establish or boost your emergency savings, providing financial security in case of unexpected costs or a loss of income.
• Purchase an annuity: An annuity can provide a guaranteed income stream, either immediately or in the future. This option may be suitable if you need the life insurance proceeds to cover monthly living expenses, especially for young families or retirees who have lost a source of income.
• Invest for growth: If you don't need the life insurance payout immediately, consider investing it in a mix of stocks and bonds for potential growth. This option can help you build wealth over time and fund long-term goals, such as retirement or buying a vacation home.
• Children's education: You can put a portion of the life insurance payout into a college fund for your children's or grandchildren's education. A 529 college savings plan allows tax-free growth and withdrawals for qualified education expenses.
• Establish a legacy: If you have sufficient savings to meet your financial needs, you may consider using the life insurance payout to support a favorite charity or organization. You can make direct donations or purchase a permanent life insurance policy and designate the charity as the beneficiary.
• Cover immediate costs: There may be immediate costs to cover, such as funeral expenses, medical bills, and shared debts such as mortgages or student loans. The life insurance payout can help alleviate these financial burdens.
• Everyday expenses and childcare: The loss of a loved one can result in additional everyday expenses, especially if they were a primary breadwinner or a stay-at-home parent. The life insurance payout can be used to cover groceries, bills, childcare, and other daily costs.

It is important to carefully consider your financial situation and seek guidance from a financial professional before making decisions about how to use a life insurance payout. They can help you weigh the pros and cons of each option and create a plan that aligns with your short-term and long-term financial goals.

Frequently asked questions