Who Gets Notified: Life Insurance Beneficiaries And The Process

Life insurance is a type of insurance contract that provides financial security for loved ones after the policyholder's death. It is essential to understand how life insurance works, from buying a policy to filing a claim, to ensure a smooth process for beneficiaries. While beneficiaries are typically notified by the policyholder before the policyholder's death, there are instances where beneficiaries are unaware of their status. In such cases, it is crucial to be proactive in finding out if you are a beneficiary and taking the necessary steps to claim the benefits. This may involve contacting family members, searching through personal papers, and reaching out to insurance companies or relevant organisations.

Insurance companies do not contact beneficiaries

In most cases, beneficiaries are aware that they are beneficiaries because the policyholder tells them ahead of time. This is the ideal situation. A loved one who is still alive lets beneficiaries know that they have been named and where to find the policy if the policyholder dies while the policy is in force. If the loved one passes away, the beneficiary knows how to locate the policy and contact the insurance company to make a claim.

However, sometimes policyholders forget to tell their beneficiaries about the policy or the details—where they keep the paperwork, how much the policy is worth, and the name and contact information for the insurance company. In these cases, it is important for beneficiaries to be proactive in finding out this information. They can ask other members of the family, look for the insurance policy itself, or check for life insurance receipts or evidence of payments in a checkbook register.

Once a policyholder has passed away, beneficiaries typically receive life insurance notification within 90 days of the death. However, this can vary depending on the insurer and whether they are able to locate all beneficiaries. Many states require life insurers to check the Social Security Administration's Death Master File every year to verify if an insured person has died. Upon confirmation, the insurer will reach out to the beneficiaries directly or through a legal representative with information about how to collect the death benefit.

That said, if a beneficiary already knows that they are on the policy, the first step is to report the death to the insurer by filing a death claim. This must be accompanied by the policy number and the Social Security number of the insured, as well as a government-issued death certificate.

Beneficiaries must file a claim to receive the death benefit

As a beneficiary, you must file a claim to receive the death benefit. This is because death benefits are not paid out automatically from a life insurance policy. You can do this by contacting the insurance company directly, either online, over the phone, in person, or by mail.

To file a claim, you will need to provide a certified copy of the death certificate, as well as other documents, such as a claim form or a copy of the life insurance policy. You may also need to provide proof of your identity. It is important to submit this information promptly, as delays can significantly impact when you receive the death benefit.

In your letter to the insurance company, state that you are looking for the documents you need to process a claim. Make sure to include the policyholder's name and policy number, their cause of death, your relationship to the policyholder, how you would like to receive the money, and your contact information.

Most death benefits are distributed either as a lump-sum payout or in installments (like an annuity), which may be subject to taxes. The timeline for processing a life insurance claim can vary depending on the policy type and the case's complexity, but with digital claim forms and electronic bank transfers, payouts can often be completed within a few days.

It is important to note that there is no set deadline for filing a life insurance claim, but it is recommended to do so as soon as possible. After about three years (depending on the state), the benefit money may be turned over to the state, and you will need to go to your state's insurance department to file the claim.

The death benefit can be paid as a lump sum or in installments

The death benefit is a payout to the beneficiary of a life insurance policy when the insured person dies. The death benefit is typically paid out as a lump sum, though some policies may offer alternative options such as installment payments or an annuity.

Lump-sum payment

This is the most common payout option. Beneficiaries receive the entire death benefit in one single, usually tax-free, payment. This method provides immediate access to the full amount, which can be crucial for covering significant expenses or debts.

Installment payments

Beneficiaries can choose to receive the death benefit in installments over a fixed period or for their lifetime. This option can provide a steady income stream, making financial planning easier. The installments can be set to a specific amount paid monthly, quarterly or annually until the proceeds are depleted. However, any interest earned on these payments may be taxable.

Retained asset account (RAA)

This is an interest-bearing account where the insurer holds the death benefit and provides the beneficiary with a checkbook to draw funds as needed. This option offers flexibility and easy access to the funds while earning interest. However, the interest earned may be subject to taxes.

Interest-only payout

With this option, the insurer keeps the death benefit and pays the beneficiary only the interest earned on the amount. The principal remains intact and can be passed on to other beneficiaries upon the original beneficiary's death. This option provides regular income but may come with taxable interest.

Lifetime annuity

A lifetime annuity provides guaranteed payments to the beneficiary for the rest of their life. The amount is determined by the death benefit and the beneficiary's age. If the beneficiary dies before the death benefit is exhausted, the remaining amount typically reverts to the insurer.

Fixed-period annuity

In a fixed-period annuity, the death benefit is paid out over a specified period, such as 10 or 20 years. If the beneficiary dies before the end of this period, their designated beneficiaries can continue to receive the remaining payments. This method ensures a regular income for a set time frame.

The payout process can be delayed for several reasons

• Inaccurate or incomplete information on forms and documents.
• Missing paperwork, such as a certified death certificate, policy details, or other required documents.
• The insured died within the contestability period, which is usually the first two years of the policy. During this time, the insurer may investigate the original application for evidence of fraud or misrepresentation.
• The insured died by homicide. The insurance company may wait until the investigation is complete to pay any benefits, especially if the beneficiary is associated with the murder or if the insured was engaged in a felony.
• The insured died in a foreign country. The insurance company may take longer to independently confirm the circumstances of the death.
• A dispute arises over the beneficiary. If multiple parties claim they are entitled to the proceeds, the insurer may postpone payment until a court establishes the rightful beneficiary.
• The insurance company made an administrative error, such as misplacing documents or failing to send required notices.
• The insured stopped paying premiums, causing the policy to lapse or terminate.
• The insured's death was the result of suicide or criminal activities.
• The policy had expired or the insured died during the waiting period.
• Issues with the cause of death, such as disputes or investigations.
• Delays in gathering required documentation, such as proof of identity and bank account information.
• Failure to stay in contact with the insurer and regularly follow up on the claim status.

Beneficiaries may need to provide additional documentation

As a beneficiary, you will need to take certain steps to receive the death benefit you're owed. You will need to file a claim with the insurance company, and you may need to provide additional documentation.

To file a claim, you will need a certified copy of the death certificate and, potentially, other documents, such as a claim form or a copy of the life insurance policy. Depending on the company's requirements, you can submit your claim either online, over the phone, in person, or by mail.

In your letter to the insurance company, state that you are looking for the documents you need to process a claim. Make sure to include the policyholder's name and policy number, their cause of death, your relationship to the policyholder, how you would like to receive the money, and your contact information.

You may be asked for additional documentation, such as proof of your identity, as your claim is being processed. Different insurance companies have different deadlines, but your payout should be quick after the claim goes through. Most death benefits are distributed either as a lump-sum payout or in installments (like an annuity), which may be subject to taxes.

It's important to note that there may be delays in the payout for various reasons, such as if the insured died within the first two years of the policy, if there are disputes over the cause of death, or if there are issues with the application. Therefore, it's essential to stay in contact with the insurer and provide any required documentation promptly to ensure a smooth and timely payout.

Frequently asked questions