Life Insurance Payout Process For Australian Beneficiaries

Life insurance is a financial safety net that provides peace of mind and helps secure your loved ones' future in the event of your passing. In Australia, the process of claiming life insurance begins with the beneficiary contacting the insurer to notify them of the policyholder's death and initiate the claims process. The insurer will then review the claim, and upon approval, the death benefit is typically paid out as a lump sum to the beneficiary/ies. However, it's important to note that the specific process and options available may vary depending on the insurer and the type of policy.

In Australia, the life insurance beneficiary is the person, group of people, trust, or organisation nominated to receive the death benefit when the policyholder passes away. The beneficiary must be over 18 years old, and there is usually no restriction on who can be nominated. Common beneficiaries include spouses, children, other family members, or charitable organisations.

The death benefit is typically paid out as a lump sum, but some policies may offer alternative options such as installment payments or annuities. The process of claiming life insurance and the available options depend on the insurer and the type of policy, such as term life or whole life insurance. It's recommended to consult a financial advisor to navigate the complexities of different policies and choose the most suitable option for your circumstances.

How to file a life insurance claim

The death of a loved one is an emotional time, and filing a life insurance claim can seem daunting. However, understanding how the process works will help you get through it more easily. Here are the steps to follow to file a life insurance claim and receive the death benefit payout.

Identify the Insurance Company

First, you need to determine which insurance company holds the policy. You can find this information in the policy documents. If you cannot access these, the policyholder's financial advisor or estate planning attorney may be able to help.

Obtain a Death Certificate

Life insurers require a death certificate to verify the policyholder's death. Get multiple certified copies of the death certificate from the relevant local authority, such as your local vital records office.

Contact the Insurer

Get in touch with the insurance company to start the claims process. They will direct you to their claim form, which may be available online or may need to be filled out in person. Ask them to explain the process, what information you need to provide, and what forms you need to complete.

Submit the Claim

Complete the claim form and submit it to the insurer, along with the policy number (found on the policy documents) and the death certificate. Triple-check your answers before submitting to avoid errors that could delay the process.

Choose the Payout Method

Insurers offer several payout methods:

• Lump sum: receive the full amount in one payment.
• Life income annuity: receive regular payments for life, calculated based on your life expectancy.
• Specific income annuity: receive payments over a fixed period, such as 10 years.
• Retained asset account: keep the death benefit in an interest-bearing savings account with the insurer and withdraw as needed.

Receive the Payout

Once the insurer approves the claim, they will pay out the death benefit according to the chosen payout method. Communicate with the insurer throughout the process to ensure a smooth transaction and follow up if there are any delays.

Additional Information

There is no set deadline for filing a life insurance claim, but it is best to do so as soon as possible. In many cases, life insurance claims can take 14 to 60 days from filing to payout. The process may be delayed due to factors such as policy type, cause of death, suspected fraud, or if the insured died within the first two years of the policy (the "contestability period").

Types of death cover insurance benefits

Death cover insurance, also known as life insurance, is intended to provide financial support to your loved ones after you pass away. It is a type of insurance contract between a policyholder and an insurance company that pays out a death benefit to the beneficiaries when the insured person dies. There are several types of death cover insurance benefits available in Australia, each offering different features and exclusions. Here are some common benefits to consider:

• Terminal Illness Benefit: This benefit allows the policyholder to receive a payout if they are diagnosed with a terminal illness and have a limited life expectancy, usually less than 12 months. This benefit provides financial support during the policyholder's lifetime, helping them cover medical expenses and other living costs.
• Funeral Advancement Benefit: This benefit provides a prompt initial payment to help cover immediate funeral expenses. It ensures that your loved ones don't have to worry about the financial burden of funeral costs during their time of grief.
• Pause Payments and Cover Benefit: This benefit allows the policyholder to temporarily pause premium payments in cases of financial hardship without losing their cover. It provides flexibility during times when the policyholder may struggle to make regular payments.
• Inflation/Automatic Indexation Benefit: With this benefit, the insurance provider increases the premium each year in line with inflation, requiring the policyholder to pay adjusted premiums. This ensures that the cover keeps up with the rising cost of living.
• Premium Freeze Benefit: Unlike the previous benefit, this one keeps the premium amount fixed, but the lump sum payout to the beneficiaries decreases over time. This benefit may be suitable for those who want stable premiums but are willing to accept a lower payout over time.

When choosing a death cover insurance policy, it is essential to carefully review the benefits, features, and exclusions offered by different insurers. Additionally, consider your own circumstances, such as your age, health, financial obligations, and the needs of your loved ones, to select the most appropriate cover for your situation.

How is life insurance paid out to beneficiaries?

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person dies. There are several kinds of life insurance, including term and permanent plans.

In Australia, the process of claiming life insurance is relatively straightforward. Here's how it works:

• Contact the Insurer: After the policyholder's death, it is the responsibility of the beneficiary/beneficiaries to contact the insurance company and initiate the claims process. The beneficiary will need to provide a death certificate and any other necessary documentation, such as a claim form. It is recommended to do this as soon as possible, as it can help expedite the process.
• Gather Supporting Information: The insurer will request relevant information to support the claim. It is beneficial to gather the necessary documents beforehand to make the process smoother.
• Complete the Required Paperwork: The insurer will provide a claims form, which needs to be filled out accurately and completely. Inaccurate or incomplete forms can lead to delays.
• Follow up on the Claim: It is important to be proactive and responsive during the assessment process. Provide any additional information promptly and maintain regular communication with the insurer.

The duration of the claims process can vary, but recent data from the Australian Prudential Regulation Authority (APRA) shows that almost three-quarters of death cover claims are processed within two weeks.

Regarding the payout options, there are typically three ways in which a life insurance payout can be distributed:

• Lump-Sum Payment: This is the most common option, where the beneficiary receives the entire death benefit in a single payment, usually tax-free.
• Life Insurance Annuity: The insurer pays out the death benefit in regular instalments over a set period, while retaining the remaining amount in an interest-bearing account. This option may not always be available, and the interest earned may be taxable.
• Retained Asset Account: The insurer holds the death benefit in an interest-bearing account, and the beneficiary can withdraw funds as needed. This option provides flexibility and is similar to a checking account, but any interest earned may be subject to taxation.

It is important to note that the specific process and options available may vary depending on the insurance company and the type of policy. Additionally, the number of beneficiaries can also impact the payout process and distribution of the death benefit.

What is the time limit to claim a life insurance payout?

There is no set deadline for filing a life insurance claim in Australia, but it is recommended that you do so as soon as possible. While there is no time limit, there are certain conditions that must be met for a payout to be collected, including the beneficiary(ies) filing a claim and the policy being in force at the time of the insured's death.

According to the Australian Prudential Regulation Authority (APRA), 71% of death cover claims are processed within two weeks, and almost three-quarters are processed within a month. However, the time taken to receive a payout will depend on your circumstances.

Under the Life Insurance Code of Practice, insurers must generally provide an outcome within six months of the claim being received or six months after the waiting period has expired. If the insurer does not meet these standards, you can lodge a complaint directly with them.

Are life insurance payouts taxable?

In Australia, life insurance payouts are usually tax-free, particularly when they are paid to a financial dependent, such as a spouse or child. However, there are certain scenarios where taxes may apply.

Interest Income

If the death benefit accrues interest before being paid out, the interest portion is taxable as income.

Goodman Triangle

This situation occurs when the policyholder, the insured, and the beneficiary are three different people. For example, if a mother (policyholder) takes out a policy on her son (insured) and names her husband the beneficiary, the death benefit can be considered a gift from the policyholder to the beneficiary. This may trigger a gift tax because the IRS views it as the policyholder giving a financial gift to the beneficiary.

Estate Tax

If the death benefits are paid to the policyholder's estate instead of a named beneficiary, the payout may become part of the policyholder's taxable estate, potentially subjecting it to estate taxes.

Non-Financial Dependants

If the payout goes to non-financial dependants, such as adult children, business partners, or anyone else who doesn't rely on the policyholder for financial stability, it can be taxed up to 35%.

Income Protection Insurance

Payouts made under income protection insurance are generally taxed on a monthly basis.

Frequently asked questions