Understanding Life Insurance Interest After Death

Life insurance policies are an important way to provide financial security for your loved ones after your death. The death benefit is the amount of money a beneficiary will receive from a life insurance policy following an insured person's death. While insurance companies will try to contact beneficiaries, it is not an automatic process, and it is up to the beneficiary to contact the insurer and start the claims process. The death benefit is typically paid out as a lump sum, though some policies may offer other options like installment payments or an annuity. The beneficiary of the policy is responsible for filing a claim and providing a death certificate and any other necessary documentation to initiate the payout.

Finding out if you're a beneficiary

Being a beneficiary of a loved one's life insurance policy isn't a common occurrence, so it's understandable if you're unsure about the rules and procedures. Here's a comprehensive guide to help you determine if you're a beneficiary and understand the process.

In most cases, beneficiaries are aware of their status because the policyholder informs them ahead of time. The policyholder lets them know about their designation and provides information on locating the policy and contacting the insurance company in the event of their death. However, there are instances where policyholders forget to disclose the policy details or share the necessary information.

If you suspect that you were intended to be a beneficiary but lack confirmation, there are several steps you can take to find out:

• Talk to your loved one: If the policyholder is still alive, the simplest way to confirm your beneficiary status is by having an open conversation with them. They can clarify your designation and provide essential details for claiming the death benefit in the future.
• Review financial documents: If the policyholder passes away before you have a chance to discuss it with them, they may have left policy information in their paperwork. Look for insurance policies, receipts, or evidence of payments in checkbook registers or digital storage (computers, mobile phones).
• Contact the life insurance company: If you believe you are a beneficiary and know the insurance company your loved one used, reach out to the insurer. You may need information such as the policyholder's name, date of birth, date of passing, and your relationship to the policyholder.
• Utilize a life insurance policy locator: Life insurance policy locator services, such as the National Association of Insurance Commissioners (NAIC) Life Insurance Policy Locator, can assist potential beneficiaries in finding lost policies and identifying beneficiaries.
• Check with the policyholder's state: Each state government maintains an unclaimed property division, which includes unclaimed life insurance death benefits. If the policyholder didn't designate any beneficiaries, the state's unclaimed property division may possess the death benefit payout.
• Ask other family members: Other family members may have information that you don't. With the appropriate authority, you can examine your loved one's personal papers or digital devices for insurance-related information.
• Contact the person's employer: If you believe your loved one had coverage through their work, get in touch with their former employer or labour union. This may lead you to the name of the insurance company, which can be a good starting point for initiating a claim.

It's important to remember that life insurance companies don't always proactively notify beneficiaries. While many states require insurers to check the Social Security "Master Death File" and notify beneficiaries, this process can take time and isn't mandatory in every state. Therefore, it's advisable to take proactive measures to determine your beneficiary status rather than relying solely on the insurance company to contact you.

Filing a claim with the insurance company

The death of a loved one can be a difficult time, and the last thing you may want to think about is money. However, filing a claim with the insurance company is an important step to ensure financial security for yourself and your family. Here is a step-by-step guide to help you through the process:

Identify the insurance company:

Firstly, you need to determine which insurance company holds the policy. This information should be detailed in the policy documents. If you cannot access these documents, you may be able to obtain the information from the policyholder's financial advisor or estate planning attorney.

Obtain the death certificate:

The insurance company will require a death certificate to verify the policyholder's passing. It is recommended to obtain multiple certified copies of the death certificate from the relevant local government agency, such as your local vital records office. This will allow you to provide the insurer with one copy and keep others in case other institutions, such as banks or government bodies, require them.

Contact the insurer:

Reach out to the insurance company to initiate the claims process. They will guide you through their specific procedures and direct you to their claim form, which may be available online or in person. Be prepared to provide basic information, such as your full name, address, date of birth, and Social Security number.

Complete and submit the claim form:

Fill out the claim form accurately and completely, providing all the requested information. Along with the form, you will need to submit the policy number (found on the policy documents) and the policyholder's death certificate. Triple-check your answers before submitting to avoid any delays caused by errors.

Choose your preferred payout method:

Insurance companies typically offer several options for receiving the death benefit payout:

• Lump sum: You receive the full amount in one payment.
• Life income annuity: You receive fixed, regular payments for life, calculated based on your estimated life expectancy.
• Specific income annuity: You receive payments over a fixed period, such as 10 years. The payment amount is determined by dividing the death benefit by the number of payments.
• Retained asset account: The death benefit is kept in an interest-bearing savings account with the insurer, allowing you to withdraw funds as needed while the rest grows.

It is important to consider the potential tax consequences of each payout method and consult a tax professional if needed.

Receive the death benefit payout:

Once the insurer approves your claim, they will release the death benefit according to your chosen payment method. Communicate with the insurer throughout the process to ensure a smooth transaction and address any delays that may occur.

Important considerations:

• Timing: The claims process can take 14 to 60 days from filing to payout. Factors that may impact the timing include policy type, insurer-specific processes, regulations, missing information, cause of death, suspected fraud, and the contestability period (the initial period after the policy is issued when insurers have the right to evaluate claims more closely).
• Multiple beneficiaries: If there are multiple beneficiaries, each person or entity typically needs to submit their own claims packet. The insurance company will assess and pay out claims as they receive them.
• Appeal process: If your claim is denied, you have the right to file an appeal. Understand the reason for the denial, review the appeals process, gather relevant evidence, and submit the appeal following the insurer's instructions. You may also seek legal advice from an attorney specializing in insurance law.

Remember, the insurance company is there to support you during this challenging time, so don't hesitate to reach out and ask any questions or address any concerns you may have throughout the claims process.

The company reviews the claim

Once the beneficiary has filed a claim, the onus is on the insurance company to review it. The company will go over the policy, the claim form, and the death certificate, which is the key supporting evidence that proves that the policyholder has passed away. A certified copy of the death certificate can be obtained through the county or through the hospital or nursing home in which the policyholder passed away.

If the insurance policy was owned by a Revocable or Irrevocable Trust, the company will also need to review the Trust document to identify the owner and the beneficiary. Most states allow life insurance companies 30 calendar days to review a claim that has been submitted.

After reviewing the claim, the company will decide whether to pay it out, ask for additional information, or deny it. In the case of a denial, the company will provide the reason why. If the claim is approved, the beneficiary can choose how they wish to receive their benefit payout.

There are generally several options to choose from:

• Lump Sum: The beneficiary can elect to receive their death benefit in a lump sum payment. This means that they get their payout all at once. This is the most popular option, but depending on the benefit amount, the beneficiary may want to consider other options. For example, the Federal Deposit Insurance Corporation (FDIC) only insures up to $250,000 in bank account balances. If the payment would cause the beneficiary's bank account to exceed this amount, they may want to transfer their balance to separate accounts to ensure its security.
• Fixed Amount: The beneficiary can choose to receive a set amount in monthly installments to make sure the money doesn't run out too quickly, especially if they're worried about giving into temptation. For instance, they could request installments of $800 each month for 10 years if the death benefit was $96,000. The company will hold the money in an interest-earning account, so be aware that any interest earned on the remaining balance is taxable.
• Retained Asset Account: Some insurance companies offer the option of a retained asset account. The death benefit proceeds are transferred into an account that earns interest, and the beneficiary will receive a checkbook tied to that account. There are a couple of benefits to choosing this option. First, the beneficiary gets to use the cash as they please while it earns interest. Second, the insurance company insures the entire amount, even if it exceeds the FDIC limit of $250,000. In other words, for high-balance payouts, this could be a safer option for the beneficiary's money. However, the beneficiary must still pay taxes on any interest earned in their account.
• Annuity: The beneficiary can choose the annuity option, which guarantees installment payments as long as they live. When the claim is filed, the insurance company will use the beneficiary's age and the benefit amount to determine their annuity payments. The beneficiary can likely ask the company to provide an estimate to see if this option makes sense, or if they prefer to choose another option.

Interest income and tax implications

Life insurance death benefits are generally not subject to income tax, and the beneficiary does not need to report the payout on their taxes. However, if the beneficiary chooses to receive the death benefit in installments, the interest earned on the benefit 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 that amount is taxable. This interest income is reported as interest received.

If the beneficiary chooses an interest-only payout, the principal of the death benefit is held by the insurance company, and the beneficiary only receives the interest earned. This interest is taxable. Similarly, if the beneficiary chooses interest accumulation, where the death benefit is put into an interest-bearing account by the insurer, the interest earned is also taxable.

If the beneficiary is an estate, the person inheriting the estate may have to pay taxes. If the owner of the policy is not the same as the insured, the payout to the beneficiary could be considered a taxable gift.

If the death benefit is paid to the insured's estate instead of an individual or entity, it could be subject to federal or state estate tax if the estate exceeds the estate tax exemption amount. In 2024, estates over $13.61 million owed estate tax.

Receiving the payout

There are several ways that a beneficiary can receive a life insurance payout:

• Lump-sum payment: The beneficiary will receive a single payment of the entire death benefit. This is the most popular option and the default choice.
• Installment payments: The insurance company will pay the beneficiary a certain amount of money on a regular schedule (usually monthly, quarterly, or yearly) over a chosen time period.
• Lifetime annuity: The beneficiary will receive a guaranteed payout for the rest of their life. The amount is typically determined by the age of the beneficiary.
• Interest-only payout: If only a small amount of the death benefit is needed, the principal of the death benefit can be held by the insurance company and the beneficiary will receive the interest earned.
• Interest accumulation: If the death benefit is not needed immediately, the money can be put into an interest-bearing account by the insurer. The account has the potential to earn interest, and the value can grow over time. The beneficiary can typically make withdrawals from the account when needed. This option may not be available in all states.

It is important to note that while death benefit proceeds are generally not taxable if they are received as a lump sum or in income payouts, any interest received is taxable and should be reported. If a beneficiary chooses a payout option where interest is earned, taxes may be owed on that interest and included in their taxable income.

Frequently asked questions