Life insurance Policies: How Payouts Work
Life insurance is a popular part of long-term financial planning. But to effectively incorporate this tool into your portfolio, you must understand how and when life insurance payouts are delivered to beneficiaries. This includes understanding how quickly benefits will be paid and designing the policy with the payout option that works best with your estate planning.
When Benefits Are Paid
Typically life insurance benefits are paid when the insured has died, and the beneficiary(ies) file a death claim with the insurance company, submitting a certified copy of the death certificate. Many states allow insurers 30 days to review the claim. Then they can pay it, deny it or ask for additional information.
Most insurance companies pay within 30 to 60 days of the date of the claim, says Chris Huntley, an insurance agent and director of marketing at JRC Insurance Group in San Diego, Calif.
“There is no set time frame but insurance companies are motivated to pay as soon as possible, after receiving bona fide proof of death, to avoid steep interest charges for delaying payment of claims,” adds Ted Bernstein, CEO, Life Insurance Concepts, Inc., a life insurance consulting and auditing firm in Boca Raton, Fla.
What Could Delay Payouts
Several situations can result in later payment of a claim. If the insured died within the first two years after the policy was issued, beneficiaries could face delays of six to 12 months. The reason: the two year contestability clause, says Huntley. “Most policies contain this clause, which allows the carrier to investigate the original application to ensure fraud was not committed. As long as the insurance company cannot prove the insured lied on the application, the benefit will normally be paid,” he says. Most policies also contain a suicide clause that allows the company to deny benefits if the insured commits suicide during the first two years of the policy.
Another scenario that could delay payment, not surprisingly, is when “homicide” is listed as the cause of death on the death certificate. In this case, a claims representative may communicate with the detective assigned to the case to rule out the beneficiary as a suspect.“If the beneficiary is a suspect, the benefit will be held until charges are dropped or he/she is acquitted of the crime,” says Huntley.
New Choices in Payout Options
Since the inception of the industry more than 200 years ago, the payout to the beneficiary was always a lump-sum payment of the proceeds.  The default payout option of most policies remains a lump sum, says Richard Reich, President, Intramark Insurance Services, Inc.
Installments, Annuities. More than five years ago, there was a monumental improvement in how life insurance payouts can be delivered to the policy’s beneficiaries, says Bernstein. These included an installment-payout option, or an annuity option, in which the proceeds and accumulated interest are paid out regularly over the life of the beneficiary.
These choices give the policy owner the opportunity to select a pre-determined, guaranteed income stream of between 5 and 40 years. “For income-protection life insurance, most life insurance buyers prefer the installment option to guarantee the proceeds will last for the necessary number of years,” says Bernstein.
Pre-death Benefits. Traditionally, life insurance policies only pay out at the time of the policy holder’s death. “However within the last 20 years, some life insurance companies have designed policies that allow their policyholder’s to draw against the face value of the policy in the event of a terminal, chronic or critical illness. These policies enable the policyholder to be the beneficiary of their own life insurance policy,” says Bernstein.
The term for this is accelerated death benefit; to learn more, read A Closer Look At Accelerated Benefit Riders. Talk with your insurance agent about whether this option makes sense for you.
Filing a Claim
The life insurance company should be contacted as soon as possible following the death of the insured to begin the claims process. The claims representative will request paperwork to process the claim.
The beneficiary of the insurance policy must obtain a certified copy of the death certificate. This can usually be obtained through the county in which the named insured dies. If the insured died in a hospital or nursing home, the institution may have completed the certificate, says Luke Brown, a retired insurance lawyer in Tallahassee, Fla., who operates YourProblemSolvers to help consumers with insurance, healthcare and consumer issues.
“The death certificate has to be submitted to the insurance company address listed in the policy along with a statement of claim, which is sometimes called a "request for benefits," signed by the beneficiary,” says Brown.
Policies owned by revocable or irrevocable trusts must ensure that the insurance company has a copy of the trust document identifying the owner and the beneficiary, adds Bernstein.
The Bottom Line
Life insurance policies provide both policy holders and their loved ones peace of mind that financial difficulties may be avoided in the event of a person’s death. To expedite the claims process, and avoid errors and delays, Reich stresses that accuracy is essential when submitting any documentation or communicating with the life insurance company. “A person’s life insurance agent can help make sure that the claim form is filled out correctly and help answer questions throughout the process,” he says.