Life Insurance Check: What You Need To Know

A life insurance check is a death benefit paid out to the beneficiaries of a life insurance policy. When the insured person passes away, the insurance company pays out a sum of money to the beneficiaries listed on the policy. This can be paid as a lump sum or in installments. The beneficiaries can use the money in any way they want, but it is often used to cover expenses such as funeral costs, mortgage payments, or education fees. Life insurance provides financial protection and peace of mind for loved ones left behind.

Characteristics of a Life Insurance Check

Who can be a beneficiary?

A life insurance beneficiary is the person or entity the policyholder names to receive the death benefit. There are two main types of life insurance beneficiaries: primary and contingent.

A primary beneficiary is the person or entity who is first in line to receive the death benefit payout after your passing. You can name more than one primary beneficiary. Typically, this is a spouse, child, or other family member.

A contingent beneficiary is a backup beneficiary who will receive the death benefit payout if the primary beneficiary passes away or can't be found. You can also name multiple contingent beneficiaries.

Your beneficiary can be a person, a charity, a trust, or your estate. Almost any person can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name. For example, in some states, you may be required to list your spouse as your primary beneficiary, and designate them to receive at least 50% of the benefit.

It's important to keep your beneficiary designations up to date as your life changes (marriage, children, divorce, etc.). You can change beneficiaries at any time, although the process may differ depending on your provider.

How to find out if you're a beneficiary

A life insurance beneficiary is someone listed on a policy who will receive the payout, also known as the death benefit, if the policyholder passes away. If you think you might be a beneficiary of a loved one's life insurance policy, there are several ways to find out. Here are the steps you can take:

Talk to your loved one

The easiest way to find out if you are a beneficiary is to speak to the policyholder directly if they are still alive. They can inform you of your beneficiary status and provide essential details for claiming the death benefit in the event of their passing.

Look through financial documents

If the policyholder has passed away, they may have left policy information in their financial paperwork. This could include insurance policy documents, life insurance receipts, or evidence of payments in a checkbook register. Remember to check both physical and digital documents, including computers and mobile phones.

Contact the life insurance company

If you believe you are a beneficiary and know the insurance company that holds the policy, get in touch with them. They may request information such as the policyholder's name, date of birth, date of passing, and your relationship to the policyholder.

Use a life insurance policy locator

Life insurance policy locator services, such as the National Association of Insurance Commissioners (NAIC) Life Insurance Policy Locator, can help track down lost policies and identify beneficiaries. This service is recommended by many state governments and is a good place to start your search.

Check with the policyholder's state

Each state government maintains an unclaimed property division for unclaimed property, including life insurance death benefits. If the policyholder did not designate any beneficiaries, the death benefit payout may be held by the state. Contacting the state's unclaimed property division could help you determine if you are a beneficiary.

Ask other family members

Other family members may have information about the policy that you don't. They may be able to direct you to the insurance company or provide details about the policyholder's wishes.

Contact the person's employer

If you believe your loved one had coverage through their employer or labour union, get in touch with these organizations. They may be able to provide information about the insurance company or policy details, which can be a good starting point for your search.

Once you have confirmed your beneficiary status, the next step is to file a claim with the insurance company. This typically involves providing documentation, such as a copy of the death certificate and other information to confirm your identity and your relationship to the policyholder. The insurance company will then process your claim and, if approved, provide you with the death benefit.

How to file a claim

To file a life insurance claim, there are several steps you need to take. Here is a detailed guide on how to do it:

Identify the Insurance Company

Firstly, you need to determine which insurance company holds the policy. This information should be available in the policy documents. If you are unable to access this information, you can try to contact the policyholder's financial advisor or estate planning attorney, as they may have the relevant details.

Obtain the Death Certificate

The next step is to obtain multiple certified copies of the policyholder's death certificate. You can acquire these from the relevant local government agency, such as your local vital records office. Having multiple copies is important, as you will need to provide one to the insurer, and you may need additional copies for other institutions, such as banks or government bodies.

Contact the Insurer and File the Claim

Reach out to the insurance company to initiate the claim process. They will guide you through their specific procedures, which may include options to file online or in person. The insurer will typically require you to fill out a claim form and provide the policy number, which can be located on the policy documents, along with the death certificate. Ensure that all the information you provide is accurate and complete to avoid delays in the process.

Choose the Payout Method

When filing the claim, you will also need to decide on your preferred payout method. There are several options available, each with its own advantages and potential tax implications:

• Lump sum: You receive the full amount in a single payment.
• Life income annuity: The insurer will make regular payments for life, calculated based on the beneficiary's estimated life expectancy.
• Specific income annuity: This option provides 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 accumulates interest.

Receive the Payout

Once the insurer approves your claim, they will disburse the death benefit according to the chosen payout method. It is important to maintain communication with the insurer throughout the process to ensure a smooth transaction and address any potential delays.

Additional Considerations:

• Timing: The claims process can vary in duration, typically taking anywhere from 14 to 60 days from filing to the final payout.
• Delays: Delays may occur due to various factors, including policy type, insurer-specific procedures, regulations, missing information, cause of death, suspected fraud, or the contestability period (the first one to two years of the policy).
• Beneficiary Rights: Beneficiaries have certain rights, including the right to know the policy amount, how to file a claim, the reason for any delays or denials, how to file an appeal, and the ability to examine documents used by the insurer in reviewing the claim.
• Denials and Appeals: If a claim is denied, you have the right to file an appeal. Understand the reason for the denial, review the policy, gather relevant evidence, and submit the appeal with supporting documentation.

Remember, while the process may seem daunting, it is important to act promptly and provide accurate information to ensure a smooth and timely payout.

Payout options

There are several options for how a beneficiary can receive a life insurance payout, including:

• Lump-sum payment: This is the simplest form of payout, where the insurance company settles the account with a single deposit. This is the most common selection but can be risky if the funds are not managed properly.
• Installment payments: Also known as a systematic withdrawal, this is where the life policy pays out the death benefit in instalments, such as 20% of the full death benefit amount every year for five years. The beneficiary usually earns interest on the unpaid amount while the insurance company still holds it.
• Straight life income: The life insurance company will make periodic payments that are guaranteed to last for the rest of a beneficiary's life, no matter how long that person lives. This long-term amount can be paid on a monthly, quarterly, or annual basis.
• Life income with period certain: A "period certain" guarantees that payments are made for at least a certain period of time, such as 20 years after the death of the insured. That way, if a beneficiary dies five years later, their contingent beneficiary would receive payments for another 15 years.
• Joint life with survivorship: This form of payout is calculated on the lives of two people and continues to pay out as long as one of them is living. A period certain can also be added to this form of payout.
• Interest-only: This allows the life insurance company to keep the life insurance benefits and pay the beneficiary the interest generated from the principal amount.
• Retained asset account: The policy proceeds can be placed in an interest-bearing account. Beneficiaries receive a chequebook if they need to access the cash, and any interest earned is taxable.
• Annuity: Also known as a life income payout, this grants beneficiaries guaranteed payments as long as they're alive. Insurance companies use the beneficiary's age when they file the claim and the amount of the death benefit to determine the payment amount.

Tax implications

The tax implications of life insurance proceeds can be complex and vary based on specific circumstances. However, it is important to understand these tax implications to maximize benefits and avoid unforeseen liabilities. While life insurance proceeds are typically tax-free for beneficiaries under Internal Revenue Code Section 101(a), there are certain scenarios that can create unexpected tax liabilities.

If beneficiaries opt for installment payments instead of a lump sum, the interest portion of these payments is taxable as ordinary income. This interest is taxed according to the beneficiary's income tax bracket. Similarly, when life insurance proceeds are held by the insurer and paid out incrementally, any accrued interest is taxable as ordinary income.

Employer-provided group life insurance plans also have tax implications. While coverage up to $50,000 is tax-exempt, coverage exceeding this amount results in taxable imputed income, calculated using IRS Uniform Premium Table I rates based on the employee's age and coverage amount.

Ownership of a policy can also impact tax liability. If the insured is the policy owner, the death benefit may be included in their estate and potentially subject to estate taxes, including state-level estate taxes with lower exemption thresholds. Transferring ownership to a trust can help minimize these taxes.

Policy loans or surrenders can also have tax consequences. Borrowing against the cash value of a life insurance policy is not immediately taxable, but if the policy lapses or is surrendered with an outstanding loan, the loan amount exceeding premiums paid becomes taxable as ordinary income. Surrendering a life insurance policy may result in a taxable gain, taxed as ordinary income.

Additionally, the designation of beneficiaries can determine the tax treatment of proceeds. Naming a trust as a beneficiary can provide structured payouts and asset protection, while designating a charitable organization as a beneficiary may offer estate tax deductions.

It is important for life insurance policyholders to consider the tax implications when purchasing a policy, as the IRS imposes different tax rules on different life insurance plans. Consulting a tax advisor can help beneficiaries manage the tax impact of interest income earned on life insurance proceeds.

Frequently asked questions