Life Insurance Payout: Beneficiary's Guide To Claiming Process

Life insurance policies don't pay out automatically after the policyholder dies. Someone, usually a beneficiary, needs to notify the insurance company of the policyholder's death. As a beneficiary, you must file a claim to ensure that you do not waste the policyholder's premiums. There is no time limit for beneficiaries to file a life insurance claim, but the sooner you file a claim for a death benefit, the sooner you will receive your money. In this article, we will discuss the steps to take to collect life insurance as a beneficiary.

Locating lost policies

Locating a lost life insurance policy can be challenging, but there are steps you can take to find the information you need. Here are some tips to guide your search:

Search the Deceased's Documents and Correspondence

Go through the deceased's paper and digital files, bank safe deposit boxes, and other storage spaces for insurance-related documents. Check bank statements for checks or automatic drafts to life insurance companies, and review mail and email for premium or dividend notices. Check the deceased's tax returns for the past two years for any records of interest income or expenses paid to life insurance companies.

Contact the Deceased's Advisers

Talk to the deceased's banker, financial advisor, and attorney. They may have information about the policy or know where to find relevant documents.

Submit a Request to the NAIC Life Insurance Policy Locator Service

The National Association of Insurance Commissioners (NAIC) offers a free online tool to assist in locating life insurance policies. You will need information from the death certificate, including the social security number, legal name, date of birth, and date of death. Once a request is received, the NAIC will ask participating companies to search their records to determine if they have a policy in the deceased's name. If a policy is found, and you are the designated beneficiary or authorized to receive the information, the participating company will respond to you.

Contact the State's Unclaimed Property Office

When a life insurance company is aware that an insured client has died but cannot find the beneficiary, they must turn the death benefit over to the state where the policy was purchased as "unclaimed property." You can search the National Association of Unclaimed Property Administrators' website, which will direct you to your state's unclaimed property database.

Be Aware of Special Challenges

There may be circumstances that complicate the search, such as the insurance company changing its name, merging with another company, or selling the policy to another company. The NAIC provides tips on its website for locating insurance companies in these situations. Additionally, the company may have gone bankrupt; in this case, contact the state life and health guaranty association. If the policy was purchased in Canada, reach out to the Canadian Ombudservice for Life and Health Insurance for information.

Consider Fee-Based Services

If you are unable to locate the policy through the above methods, fee-based services are available to assist in the search. MIB, an insurance membership corporation, offers services for a fee that may be able to find evidence of life insurance applications. Several private companies can also assist in the search for a lost policy.

Required documents

To collect life insurance as a beneficiary, you will need to provide certain documents to the insurance company. While the specific requirements may vary, here is a list of documents you will typically need and how to obtain them:

Death Certificate

A certified copy of the death certificate is required by insurance companies as proof of death. This helps prevent fraud and ensures that they only pay out on legitimate claims. You can request a copy from the medical professional who confirmed the time and place of death or the funeral home. Alternatively, you can contact your local vital records office to obtain a copy.

Life Insurance Policy Documents

The life insurance policy documents contain important information such as the policy number, the insured's personal information, and contact details for the insurance company. If you cannot locate these documents, you can contact the insurance company directly or reach out to the decedent's financial advisor, attorney, or accountant for assistance.

Claim Form

Also known as a "request for benefits" form, this is where you will provide detailed information about the policyholder, including their policy number, date and time of death, cause of death, and your relationship to the policyholder. You will also indicate your preferred method of receiving the payout.

Identification Documents

The insurance company may ask you to provide proof of your identity during the claims process. This could include documents such as your Social Security card or birth certificate.

It is important to note that insurance companies may have specific requirements and preferences for the format of these documents, so be sure to clarify with them directly to avoid any delays in processing your claim.

Contacting the insurance company

When you contact the insurance company, you will need to notify them of the death of your loved one and provide them with some essential information. This includes the insured's full name, date of birth, state of residence, policy number, date and cause of death, and a copy of their death certificate. Be sure to follow the insurer's instructions carefully to avoid any delays in your payment. For example, some insurance companies may want notarized originals of the death certificate, while others may prefer scanned copies.

If you are unable to locate the policy, you can call the insurance company, and they can look up the information for you. The insured's financial professional, attorney, or accountant may also be able to assist you in locating the policy. Free resources are also available to help you locate lost life insurance policies, such as the Policy Locator Service provided by the National Association of Insurance Commissioners (NAIC) and the Life Insurance Policy Locator tool offered by the National Association of Unclaimed Property Administrators (NAUPA).

It is important to be prepared before contacting the insurance company to make the process easier and less stressful. Having the necessary documents and information ready will help prevent any unnecessary delays in receiving your benefit.

Payout options

Once you have filed a claim, the next important step is to select how you want to be paid. The specific payout options may vary depending on the insurance company and type of policy, but the two main options are:

• Lump sum: You receive the entire death benefit in a single payment. This is the most straightforward and immediate option, providing a large sum of money all at once. This option is often chosen to cover pressing financial matters such as funeral costs, mortgages, and other bills.
• Annuitization: The insurer may provide options to receive your death benefit in installments over time. These options could include fixed amounts over a specific period until depleted, or payments designed to last your lifetime. If you choose this option, it is a good idea to discuss your options with a financial professional to ensure they fit your needs over the long term. Annuities are accounts in which you can invest the death benefit, and you may need to pay taxes on investment gains.

Life insurance death benefits are typically not subject to federal income tax when paid out to the beneficiaries. However, there are some situations where the death benefit could be taxed, so it is important to consult with a tax professional or estate-planning attorney if you are concerned about the tax implications of receiving a death benefit.

Tax implications

As a beneficiary of a life insurance policy, you generally won't need to pay taxes on your payout. However, there are a few exceptions to this rule.

Firstly, if the death benefit is paid out in instalments and the remaining portion earns interest, that interest is taxable. This is because, while the lump-sum proceeds of the life insurance policy are typically not considered taxable income, any interest earned on the death benefit is subject to tax.

Secondly, if the money is paid to the insured's estate instead of a named beneficiary, it could be taxable. This is because the estate tax applies to estates over a certain value ($13.61 million in 2024).

Thirdly, if the owner of the policy is not the same as the insured, the payout to the beneficiary could be considered a taxable gift.

It is important to note that, while life insurance proceeds are generally not taxable, associated taxes related to interest earned during the collection process may apply. Therefore, it is advisable to consult with a tax professional to understand the specific tax implications of your situation.

Frequently asked questions