Life Insurance Payout
Life insurance payout is a payment by the insurance company to the insured’s beneficiaries. However, the type of life insurance policy or payment is determined by the agreement between the policyholder and the insurance company.
- Written by Lindsey Crossmier
Lindsey Crossmier
Financial Writer
Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.
Read More- Edited By
Michael Santiago, CRPC™
Michael Santiago, CRPC™
Senior Financial Editor
Michael Santiago, a senior financial editor, joined RetireGuide in 2023. With over 10 years of professional writing and editing experience, he brings a wealth of expertise in creating content for diverse industries, including travel and healthcare. Having traveled to more than 40 countries across five continents and lived in Europe and Asia for several years, Michael's global perspective enriches his work. He combines his strong writing skills, editorial judgment and passion for crafting accurate and engrossing content to enhance the user experience on RetireGuide.
Read More- Reviewed By
Eric Estevez
Eric Estevez
Owner of HLC Insurance Broker, LLC
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.
Read More- Published: May 22, 2020
- Updated: July 6, 2023
- 8 min read time
- This page features 4 Cited Research Articles
- Edited By
- Life insurance payouts are not automatically processed by insurance companies; instead, beneficiaries must request them.
- While there is no specific time frame limit, beneficiaries are encouraged to initiate the payout process with the insurance company within 30-60 days to prevent any potential delays.
- Various payout options are available, including installment payments, annuities, lump-sum payments or a retained asset account.
- Life insurance payouts are generally not subject to taxation, but it is important to note that any interest earned from a life insurance payout may be taxable.
Types of Insurance Payouts
In most cases, beneficiaries choose the type of life insurance payout after the insured dies. Payout options include lump-sum payments, installments and annuities and a retained asset account.
Lump-Sum Payments
Lump-sum payments represent the prevailing form of life insurance payout. This type of payment offers beneficiaries immediate access to funds, ensuring prompt financial security. The received amount can be utilized for various purposes such as covering funeral and burial expenses, medical bills and other outstanding obligations. Lump-sum payouts are generally tax-free unless the funds are left to accumulate interest in an account.
Installments and Annuities
Installment payments and annuities are two more payout options to consider if a lump-sum payment would be problematic.
Installment payments are unlike other options because the insured chooses this option instead of the beneficiaries.
They can spread the payments out over five to 40 years, with the bulk of the death benefit accruing interest until it is all paid out. This allows the insured to guarantee an income stream for their beneficiaries.
Annuities are a financial instrument that pays a fixed income over a specified period. A beneficiary can take some or all a lump-sum payment and buy an annuity. This provides an income stream to the beneficiary for the annuity term.
A fixed-period annuity, also known as a period-certain annuity, entails distributing the payouts over a predetermined number of years. In the event of the beneficiary’s death, any remaining payments will be received by the beneficiary until the expiration of the fixed period.
A lifetime annuity guarantees a payout consisting of a percentage of the death benefit along with annual interest for the duration of your life.
Retained Asset Account
Retained asset accounts are checking accounts run by the insurance company that pays the death benefit.
The money is kept in the retained asset account, and the beneficiary receives a payout checkbook. The beneficiary writes checks on the account as the money is needed. There are no penalties or limits on how much money the beneficiary may withdraw from the account.
The account accrues interest as long as it remains open.
Other Payout Types
Various alternative options exist for selecting a life insurance payout, offering suitability for different individuals. Some of these options include:
- Interest Income
- The insurance company retains the death benefit while making interest payments to the beneficiary for either the remainder of their life or a specified fixed period.
- Life Income
- The insurer calculates a fixed, guaranteed monthly income for life based on the beneficiary’s age and sex.
- Life Income With Period Certain
- A similar calculation to life income, but with a specific number of years.
- Specific Income
- Allows annual payout of a fixed amount as extra income for the beneficiary.
How Long Does It Take To Get a Life Insurance Payout?
What is the claim processing time?
Most life insurance claims are paid out within 30 to 60 days after filing a claim, but delays can occur. In numerous states, insurance companies are typically granted a 30-day period to review a claim before making a payout, denying the claim or requesting additional information.
What are the policy requirements?
To initiate the filing process, it is necessary to submit essential documents, including the insured’s death certificate, a claim form and any other documentation requested by the insurance company. The timeline for submitting these documents will directly impact the payout schedule. Therefore, carefully reviewing the paperwork and ensuring there are no discrepancies that could potentially delay the approval process is crucial.
What documentation and information are needed, and how does the speed of receiving the necessary items impact processing times?
Insurance companies are incentivized to expedite payouts upon receiving a claim and proof of death, as delaying the payout can result in high-interest payments to the beneficiary. Nonetheless, submitting the required documents in a timely manner accelerates the payout process.
What are the external factors?
Other factors may influence the payout timeline, such as the condition of the legal requirements, disputes between beneficiaries, death claims and a case requiring more investigation into the deceased’s death.
Should I contact the insurance company directly for specific claim processing timelines?
It is highly recommended to maintain regular contact with the insurance company and follow up diligently during the filing and documentation process. This proactive approach ensures a smoother experience, expedites the process and eliminates the burden of unnecessary complications.
Payout Delays
Certain situations involving the cause or circumstances of the insured’s death can delay life insurance payouts.
Most policies allow the insurer to investigate the death to ensure there has been no insurance fraud or inconsistencies to discredit the insured or beneficiary’s claims.
Is a Life Insurance Payout Taxable?
Death benefits are typically not classified as gross income, exempting them from the need for reporting to the Internal Revenue Service (IRS). However, any interest earned on the death benefit is subject to taxation and must be reported as interest income, as per the IRS guidelines. It is important to note that the interest can accumulate rapidly, particularly considering the substantial sums involved in life insurance payouts. This aspect should be considered when deciding on the preferred type of payout, as many options involve interest payments.
Are You a Beneficiary of a Life Insurance Policy?
Insurance claims are not automatically initiated upon the death of the insured. While the process is generally straightforward, beneficiaries are required to provide specific documents to file a claim. It is important to note that this process can take some time, but potential or confirmed beneficiaries should gather the necessary information and documents and remain persistent throughout the process.
- Review Personal Records
- It is crucial to carefully review records, conversations and emails involving the insured, as they may provide valuable insights into determining whether you are a beneficiary based on your relationship with them.
- Contact the Insurance Company
- Contact the insurance company and learn about the type of life insurance payout and the defined policy for the insured.
- Consult With the Deceased’s Attorney or Executor
- Reaching out to the deceased’s attorney or financial advisor is also necessary to understand the nuances of the life payout process and to know the proper steps regarding the payout.
- Check With Other Family Members or Close Contacts
- Close contacts or relatives can also provide valuable information that may offer clues about the insurance policy or whether you are listed as a beneficiary of the policyholder or insurance customer.
- Search for Documentation
- Search for related documents such as policy papers, premium receipts and other associated documents that may indicate the possibility of your beneficiary status.
- Consult With a Professional
- Prior to making any financial decisions, particularly those involving substantial amounts, it is advisable to seek guidance from attorneys or finance experts who possess a comprehensive understanding of insurance and its related banking policies.
How Is Life Insurance Paid Out to Beneficiaries?
Life insurance benefits can be paid out differently, but here are the common payment methods:
- Lump-Sum Payments
- In the context of payouts, it is important to note that the entire sum of money is typically disbursed at once or instantaneously.
- Installment and Annuity Payments
- In contrast to the previous payment type, beneficiaries may receive the money over an extended period rather than in a lump sum.
One distinction between lump sum payouts and other types of payouts is that if the latter is scheduled over an extended period, the interest earned may be subject to taxation.
Frequently Asked Questions About Life Insurance Payout
- Special focus on content about life insurance, Social Security, Medicare and certificates of deposits (CDs)
- Research-based data drives her work
- Bachelor’s degree in English from the University of Central Florida
4 Cited Research Articles
- Texas Department of Insurance. (2023, May 02). Life insurance guide. Retrieved from https://www.tdi.texas.gov/pubs/consumer/cb018.html
- U.S. Internal Revenue Service. (2023, February 07). Are the Life Insurance Proceeds I Received Taxable? Retrieved from https://www.irs.gov/help/ita/are-the-life-insurance-proceeds-i-received-taxable
- Rudden, J. (2022, January 11). U.S. life insurance: average face value of policies purchased 1997-2018. Retrieved from https://www.statista.com/statistics/254619/face-amount-value-of-individual-life-insurance-policies-purchased/
- U.S. Internal Revenue Service. (2019, November 25). Life Insurance and Disability Insurance Proceeds. Retrieved from https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
Your web browser is no longer supported by Microsoft. Update your browser for more security, speed and compatibility.
If you need help pricing and building your medicare plan, call us at 844-572-0696