Many clients often ask, and many consumers want to know one thing. If something did god forbid happen. How is life insurance paid out to beneficiaries? How will my family ultimately collect the life insurance or claim? Will they run into any surprises?
Life Insurance although popular in the financial planning world, is not utilized nearly as often as it should be. It’s unfortunate. When it is used, however, it’s important to understand precisely how it works and what you can do to be prepared.
Understanding how life insurance is paid to your beneficiaries and when is what ultimately will allow you to sleep just a little bit better at night knowing that your family is taken care of and you have nothing to worry to about if unfortunate circumstances did arise and you ultimately met your maker prematurely.
It’s important to know that the life insurance will ultimately pay your beneficiaries that you have designated on your life insurance policy but it’s also important to understand how it pays and when it pays and what the process may look like.
Otherwise, you probably don’t feel any better now than when you didn’t even have life insurance in the first place.
Knowing how your life insurance is paid out to your beneficiary is a crucial piece of your final planning in many aspects including estate planning or just simple funeral arrangements.
No worries, we are going to cover all of that for you.
So, let’s begin.
How is Life Insurance Paid out to Beneficiaries? When are the proceeds or Benefits Paid?
The life insurance proceeds are only going to be paid upon the death of the insured. I think this is known and obvious. Also, you are going to need to file the claim with the life insurance company you had your policy “in force” with or whom you were paying your premiums to over the course of owning the policy.
This is going to require a death certificate. No way around this. In the United States, in almost all states, the life insurance company is allowed a window of time to review the claim before paying. In nearly all circumstances, this window is 30 days. The life insurance company during this phase can do 1 of 3 things.
What could slow down this process?
Anytime the insured passes away inside of the 24-month window from the policy start date is going to delay the claims process substantially with all life insurance companies. You don’t have a choice with this, and there is nothing you can do to avoid this. It’s the law in all 50 states.
It’s known as the 2-year contestability clause.
What is the 2-year contestability clause?
This clause allows the life insurance company to delay your death claim if it occurs within the first 2 years of beginning your coverage. It’s designed to allow the company adequate time to investigate the original life insurance application and cause of death to make sure no funny business is taking place.
If the life insurance company can show you misrepresented information or committed any fraud during the original application, it could cost you or your family the payout. This period also protects the life insurance company against suicide cases that occur within the first two years of the policy being active.
After the 2 Years Is up, The Benefit Swings Back Into your Favor
The opposite side of the fence goes back into the consumers or clients favor. Once this 2-year window is expired for the life insurance company to contest your claim, the opposite holds true. The policy is now incontestable.
All state laws agree that the life insurance company has had adequate time to dig, investigate or rightfully not accept an applicant after this 24-month window is elapsed.
Just meaning, now if something happens to you, it’s going to be a pretty quick and streamlined claim process if your family has all their ducks in a row and proper paperwork ready to file with the company.
Don’t be Upset by Contestability Period. It Exists for A Reason
The two-year contestability protects the life insurance company. Without, many dishonest or fraudulent individuals would be able to game the system freely and easily. If this were possible, the honest individuals who have paid premiums for years would have a tough time collecting payouts if the companies were slowly losing surplus or becoming insolvent.
It’s a legal process and a legal document when you purchase life insurance. Both sides of the fence should be allowed to be protected equally so that everyone can win.
Do life insurance companies contact the beneficiaries for you?
This answer is probably not what your wanting to hear, but the answer is yes and no. If the life insurance company has valid information on the beneficiary including contact information such as phone number, address, and email, they will contact that individual beneficiary when a claim is completed.
Now, the opposite can also hold true. If you didn’t keep the beneficiary information up to date or it’s no longer the correct information, the life insurance company has no duty or obligation to find your beneficiary for you.
They are not going to hunt down or send a team to find your beneficiary to deliver the payout.
The life insurance payout/claim in this circumstance is going to be unsettled during this time. If you think you were supposed to receive a payout for a life insurance policy, you need to dig up the records and contact the company directly. You can always try and reach the agent of record as well if you know who it is.
Keep your records and policy up to date with the correct contact information and inform your beneficiaries of where you keep the policy records, whom they need to contact and how to contact them to avoid further issues if something was to happen.
Who can change the beneficiary on a life insurance policy?
Assuming your original beneficiary designation was considered revocable, the owner of the life insurance policy withholds the privilege and right to change and rename his or her beneficiary at any time without anyone’s consent.
If, however, when the policy was started, the beneficiary was listed as irrevocable, then the situation changes a bit.
Now you need that specific beneficiary to give you the green light or permission to make the change on the beneficiary before anything can be done.
Be careful who you select as beneficiaries and how you structure the beneficiary class. You want the payout and proceeds to ultimately hit the bank accounts of the people you want to provide for and can be trusted with the money.
Don’t list someone as irrevocable if you think there is even the slightest chance you may want to make a change in the future. It may cause you a lot of frustration and time if you make these costly mistakes when originally taking out the policy.
What happens to the life insurance with no beneficiary listed?
The easiest way to explain this is that it’s on you. Making sure the beneficiary is listed is 100% on you the client, not the insurance company. All agents and the company themselves will ask you who your beneficiaries are, and you will list them accordingly on the application.
The original application is usually even bound inside the policy you receive after being approved. If you don’t have anyone named or don’t make changes throughout the life of the policy, your estate will be paid the life insurance payout.
There is really no way around this except making sure you stay diligent with your policy and keep everything up to date and how you prefer it to be in case the day comes when you need it to do exactly what you purchased it for.
How much will the life insurance company pay out?
This question is very straightforward. Your beneficiaries in the event something happens to you will be paid the face amount of the policy. This is the coverage amount you originally selected that’s included in the policy face page and the original documents.
A simple example would be if your face amount is 250,000.00, your designated beneficiary will be paid 250,000.00 dollars.
The only other factor is how exactly they pay it out. What do I mean by this?
Well, new ways of receiving the death benefits of a life insurance policy are now available. Protective Life Insurance offers a term product that allows you to spread the payments over a course of years. In exchange, they will lower your monthly premiums.
Let’s assume you have a 1,000,000.00-dollar life insurance policy. Instead of taking the money in a lump sum, you can elect to take 10 annual payments of 100,000 instead and receive a break on your monthly bill for doing so.
This would basically be known as the installment option for the payout option. Some companies are also offering what’s known as living benefits built into the policies.
What are living benefits and how do they impact your death proceeds to your beneficiary?
Living benefits is where the life insurance will have certain “triggers” built into the life insurance policy. A trigger is tied to a health event that occurs. When it occurs, you have the option of accelerating some of the death benefit during this time to help cover expenses.
It isn’t at no cost to your beneficiaries. The total amount taken will be deducted from your total death benefit proceeds that are designated toward your beneficiaries. Weighing your options carefully is crucial. Let’s look at an example of this.
Total Face Amount of a Life Insurance Policy You Have= 250,000.00
Your policy includes living benefits. You suffer a stroke or heart attack this year and elect to fast forward 125,000 while you are still living.
Your son, daughter or another beneficiary will now receive the 250,000-125,000.00= 125,000.00 total payouts.
Obviously, this money helps you greatly during a time of high medical expenses, but it could also contradict the original reason why you took the life insurance policy out to begin with. Weigh your options carefully and decide what’s best for you and your family.
Who gets the life insurance payout?
We have already touched on this in depth but let’s cover it briefly one more time. In the event of your death, the payout will be paid to your primary beneficiary first. In the event a primary beneficiary is not living, or one is not designated it would than go to a contingent beneficiary.
Here’s an example. You take out your life insurance policy and have your wife designated as your beneficiary at 100% for 250,000.00 in coverage. Your son is your contingent beneficiary. In the event, god forbid, you and your wife are killed in the same car accident, your son would now receive the full 250,000.00 payouts.
In the event you don’t have a contingent beneficiary listed and all these unfortunate circumstances take place, the life insurance would be paid out to your estate at death.
What if the life insurance payout timeline
Typically, if there are no issues with the filing of the death certificate and you have cleared the 2-year window from when the policy began, it’s going to be somewhere between 30-60 days to have your claim and processed and the money in the hands of the beneficiary.
Who’s the best paying life insurance company?
Surprisingly we get this question a lot, but all life insurance companies follow the same state laws in all 50 states. The companies that are known, used and trusted all follow the same guidelines. Minor changes of course with some companies but no one company really pays better than the rest.
Again, it’s the face amount of the policy paid to the beneficiary. Outside the 2 years expect 30-60 days and inside the window expect the company to drag their feet a bit and complete their due diligence on their end.
What Should you do with the life insurance payout?
You have endless possibilities and no good answer really exist for this question. Obviously, the bare minimum would be to cover the final expenses of the insured who has recently passed away.
In addition, it’s always recommended to reinvest the proceeds or do everything possible to preserve the proceeds instead of squandering it.
Often you will also have estate taxes and end of life cost that arise. Some of the other most common uses of life insurance proceeds would include the following.
How long do you have to claim life insurance?
Although there is not a hard number on how fast you must get the documents into the insurance company, there is something known as a statute of limitations with life insurance.
This doesn’t apply to when the claim needs to be filed but has to do with a “rejected” or denied life insurance claim. If you are one of the individuals who gets denied the death benefit of the insured after submitting the documents necessary, you have two years to take legal action to battle the insurance company. After this window is expired, you are out luck.
So, do we feel we know how life insurance is paid out to beneficiaries?
If your feeling like your newbie or are on an island alone for having these questions, you’re not. It’s extremely common and that’s why we are here. We take pride in providing the answers and doing everything we can to serve and assist the general public and those seeking to protect their families with life insurance.
We also take pride in knowing we can help you achieve the lowest possible life insurance rates. If you haven’t done so and need a quote, don’t forget to fill out the instant quote form on the right.
When we say we are a no pressure life insurance agency, we truly mean that. No sales gimmicks, no pressure and once we have helped, we have completed our end of the bargain. Any experiences with death claims and life insurance? We would love to hear from you. Be sure to leave a comment below.
Till Next Time.
Josh Martin is the founder of Good Life Protection. He began his career as a captive Agent working for New York Life Insurance Company. After continued education and designations, Josh founded Good Life Protection to provide consumers with more options and insurance that truly fits into your budget and health classification.