Key takeaways

• • Primary beneficiaries are responsible for filing life insurance claims.
  • Claims are usually paid quickly, often in less than 30 days.
  • Lump sum payouts pay the entire death benefit at once.
  • Delays in payment may be due to death occurring in the first two years of the policy, which may require a claim review.

The passing of a life insurance policyholder triggers a series of events leading to the payout of the death benefit. If you are the primary beneficiary, it will be your responsibility to set the wheels in motion.

Filing a claim

The first step in the claims process is to report the death to the insurance company and file the claim. You’ll typically be required to provide a copy of the life insurance policy, as well as a certified death certificate for the deceased. In some cases, the insurance company may ask for supporting documents. This is most common when the policy is relatively new, and / or the cause of death is unclear.

What can cause delays in life insurance policy payouts?

Claim Review

Many states allow the insurance company 30 days to review the claim. In many cases, the insurance company will pay out the claim sooner than 30 days. Exceptions may apply in certain circumstances, which can cause further delay.

Suspected Fraud

If there is any reason for the insurance company to suspect fraud, an investigation may be opened. If the facts indicate fraud, state law may require the insurer to report the incident and the payout will likely not be made to the policy beneficiary.

Contestability Clauses

Most insurance policies have a one to two year period from the date of the policy inception to contest payouts. A payout may be contested if the policyholder died from suicide or an excluded cause of death, such as a pre-existing condition not covered by the policy, or if important information was left off the policy application.

Homicide Investigations

If the cause of death was homicide, the insurance company will hold the payout until the beneficiary has been cleared as a suspect. If there are any charges against the beneficiary, the payout may be held until the charges are dropped or the beneficiary is otherwise cleared of any crime related to the death.

Payout options

Once the claim has been approved, the payout can be completed. Many insurance companies offer multiple options when it comes to payout. The most common payout options include a single lump sum payment or annuity-based payments.

Lump Sum Payouts

A lump sum allows you to receive the entire death benefit at once, if you are the primary beneficiary. If there are multiple beneficiaries, this is also the simplest way to receive and divide a life insurance policy payout. You and the other beneficiaries will each receive your designated share of the payout. A lump sum payout makes it easier to divide an inheritance on the spot, ensuring each heir gets their fair share.

Annuity Based Payouts

An annuity payout is structured more like an installment plan. Instead of receiving the entire death benefit at once, you can opt to receive smaller payments on a regular basis across an extended time period. This can be an attractive option if you or another beneficiary want to control the flow of the money and limit overspending. Annuity payouts provide for an “income” of sorts, helping to replace the income of the deceased.

Payouts and taxes

Life insurance death benefit payouts aren’t subject to income tax, but interest earned on a policy may be taxable. You should consult a tax professional who can help you minimize your tax liability. In most cases, life insurance policy payouts don’t come with strings attached – once you receive your designated portion of the payout, you can use it however you wish.