Anyone thinking about purchasing life insurance must have a deep understanding of how payouts work. Although the purpose of life insurance is to give your loved ones financial security in the event of your death, accessing the payout of your policy may be a little bit tricky.
There are several factors that affect how beneficiaries of a life insurance policy receive money after the policyholder passes away. It mostly depends on the type of policy, the claim process, and the tax implications.
This article aims to clarify how insurance payout works; we will be highlighting the typical procedures of claiming an insurance payout and other important information that beneficiaries need to be aware of. In order not to miss out on detailed and comprehensive information, ensure you read to the end.
What Is a Life Insurance Payout?
A life insurance payout is typically a stipulated amount of money that the beneficiaries are given once the policyholder passes on while the policy is still active. Before the purchase of a life insurance policy is finalized, policyholders will be required to name certain people that would claim the proceeds of their policy when they are no more.
However, it is important to note that life insurance will not payout in the event of a suicide. If you take your own life within the first year of the policy, your beneficiaries may not receive the death benefit.
How Much Does Life Insurance Payout?
The payout of a life insurance policy is determined by the amount of death benefit defined by the policy. Nevertheless, the amount that a life insurance policy pays out varies greatly depending on a number of criteria, such as the policy type, the policyholder’s chosen coverage amount, and the premiums paid.
Depending on their financial needs and objectives, people can typically select coverage amounts ranging from thousands to several million dollars. The final payout is also determined by the terms of the policy, such as if you include any riders or extra benefits.
Life Insurance Payout Options
There are different ways in which beneficiaries can access insurance payouts once the claim has been approved by the insurance company. Highlighted below are three common options for life insurance payouts.
• Lump sum
This is one of the most common and easiest life insurance payout options. It is often an ideal option for beneficiaries who have an urgent need and seek immediate access to funds. A lump-sum payout is often used to cover outstanding bills and end-of-life expenses.
• Annuity payout
For an annuity payout, the death benefit is converted to regular payments over a specific period of time for the lifetime of the beneficiary. Rather than getting a lump sum, the insurance payout will be paid periodically; it could be monthly, quarterly, or yearly till the fund finishes.
• Retained asset account
Some insurers allow you to keep money in a retained asset account and take it out whenever you need it. The account functions similarly to a checking account in that it bears interest, and you can withdraw your money whenever you want. The initial insurance payout is tax-free, but any interest earned may be taxable.
How is Life Insurance Paid Out?
The payout of a life insurance policy is mostly influenced by the number of beneficiaries listed on the policy. Let’s give an insight on how life insurance payout works.
- One Beneficiary: If you name just one person or an organization as a beneficiary on our life insurance policy, he or she will be the one to claim and receive the payout.
- Multiple Beneficiaries: In the event that you name more than one beneficiary, you need to determine the specific amount that will go to each of them. You will be required to designate a percentage or dollar amount that is to be received by each beneficiary.
- Contingent Beneficiary: The contingent beneficiary can only claim a life insurance payout if the primary beneficiaries are no longer alive. If you name more than one contingent beneficiary on your policy, each of them will file a separate claim for the specific amount you left for them.
- No Beneficiary: There are cases where the policyholder has no primary or contingent beneficiaries to claim the death benefit. In a situation like this, the death benefits will be paid and put to the estate of the policyholder. It would then go through a probate process where it would be decided to be paid to either lenders or the policyholder’s heirs.
How Long Does It Take For A Beneficiary To Receive An Insurance Payout?
The exact amount of time it takes to receive payouts from life insurance typically depends on several factors. Generally, beneficiaries receive payout within 30 or 60 days after a claim was made to the insurance company. However, there are certain things that can potentially delay insurance payouts, such as:
- Policy lapse
- Cause of death (in the event of a suicide, getting an insurance payout is almost impossible)
- Incorrect paperwork
- Suspected fraud
Furthermore, the claim process can take longer than 60 days if the insurance company feels the need to investigate the claim. This is mostly done when the policyholder passes on within the first or second year of buying the policy.
Are Life Insurance Payouts Taxable?
Fortunately, life insurance payouts are not taxable. The proceeds of a life insurance policy are not usually subject to federal income tax. Nonetheless, the interest accrued on your policy through a retained access account may be taxable. For instance, if the policyholder had an outstanding loan against the policy before passing on, the insurance company will deduct the amount owed from the payout.
Furthermore, the policy may be taxable if it is transferred for value prior to the death of the policyholder. Additionally, any interest received on the payout following the insured’s passing could be subject to taxes. Beneficiaries should speak with a tax professional for a better understanding of tax implications for their specific situation.
Which Life Insurance Payout Do I Need?
Most insurance companies grant beneficiaries the opportunity to choose a method of payout that suits their needs and preferences. The decision as to which insurance payout option to choose now depends on your need and individual circumstance.
A lump-sum payout can be an ideal option for those with a mortgage or any other huge financial need. The most important thing is to factor in your needs and situation when determining which life insurance payout to opt for.
