How Life Insurance Payouts Work: A Quick Overview
Family members can get a life insurance payout upon the policyholder’s death, depending on the policy terms. Since payouts are not automatic, some beneficiaries may have difficulty claiming a benefit. Here are important points to know about how a life insurance payout works.
How a Life Insurance Policy Works
Three main types of life insurance policies are available to people of all ages. The whole life, aka permanent insurance, extends beyond the policyholder’s life to provide income for survivors. The other most common type of life insurance plan is term life, which is good through the duration of the term, which might be 10 to 20 years.
While whole life offers the most benefits, term life is more affordable. The third type of life insurance is a hybrid plan that borrows from whole and term life insurance concepts.
When the policyholder dies during an active life insurance plan, named beneficiaries can file request forms for payouts. The first payouts for death benefits go to primary beneficiaries in which percentages of payouts may be listed. If no beneficiaries are listed on the policy, payouts go to the estate. Minors will not be able to receive direct payouts, as the state may designate a legal guardian to oversee the benefits.
Options for Beneficiaries
Here are the main options for beneficiaries on how to receive their payouts:
- Lifetime income: Beneficiaries can spread the benefit payments throughout the rest of their lives. Your age and benefit size will impact the amount of the payout.
- Fixed installment: You have the choice of receiving regular fixed monthly payments until they run out.
- Interest earnings: Whole life insurance plans pay interest earnings.
- Select payment time frame: This option allows you to receive income for life or over a certain number of years.
- Receive a lump sum: Many beneficiaries prefer the one-time lump sum payout since it can be thousands of dollars. A lump sum allows the recipient to pay off debts or invest the money.
Process of Filing a Claim
When a life insurance policyholder dies, it’s up to each beneficiary to submit a request form with a death certificate to the insurance firm for a payout. A beneficiary should contact the insurer and ask questions to get a clear idea of how and when payouts will be arranged.
The entire process of filing a claim takes about a month before beneficiaries receive payouts. For the fastest results, it’s best to ensure the request form is complete without missing items. Any small errors can delay the review process. The manner in which the policyholder dies affects payouts because certain scenarios such as suicide or death while breaking the law aren’t covered.
Since lump sum death benefits are usually tax-free, all that the beneficiaries of these payouts have to worry about is receiving the right amount of money. However, if the payments are distributed via monthly installments, you may have to report it as taxable income.
If beneficiaries fail to request or receive the payments they expect, it’s still possible to collect the money years later. Unpaid beneficiaries can review the policyholder’s records and inquire with their state’s unclaimed property agency.
A beneficiary can get a life insurance payout in a short time if they take the proper actions. Our experts at Remland Insurance are ready to answer your questions about getting an effective life insurance policy and receiving benefits. Contact us today to get started!