How Does a Life Insurance Payout Really Work?
Several key steps can help you get your life insurance payout quickly. Follow them to avoid having to wait a long time to access your benefits.
Life insurance seems like a pretty straight forward product. For some, life insurance payouts can be crucial for stabilizing a family's finances when the insured party dies. For others, the associated payout options and decisions are overwhelming to consider.
Regardless of the dollar amount, understanding how life insurance payouts really work can be a real challenge for many beneficiaries. When a loved one dies, some people believe that claiming on the life insurance policy is as easy as providing a few documents. Unfortunately, that’s not always the case. Here is a look at the steps that lead you through the process of making a death claim for a life insurance payout with ease.
Read: Bad Insurance Advice You've Probably Received at Some Point
Step 1: Initial Paperwork - Policy Documents & the Death Certificate
One of the first and easiest ways to get started is to locate your insurance policy documents. Next, contact your broker orinsurance advisor to update them on an impending claim. Depending on the relationship you have with them, you may be able to ask for tips or support in expediting the file.
Regardless, you will be required to get a certified copy of the insured's death certificate. In most cases, the funeral home will register the death and send the original documents to Vital Statistics. After a death is registered, you can order new documents from a registry agent. Death certificates requested are obtained from the vital statistics office of the province in which the event occurred.
Step 2: Filing or Opening a Claim
As soon as you have the above documents in order, contacted the life insurance company to begin the claims process. Depending on your insurance provider, you may be able to file a claim online through the insurance company's website. If this is not an option for you or the company, you will need to initiate the claim over the phone. Regardless of how you file, you will need to provide a certified copy of the insured's death certificate to process the request. The claim may be opened but will not get filed, nor will you receive a payout until all the documents are received.
Step 3: Stay Informed and Patient while the Claim is Processed
The third and most frustrating step is to stay informed on estimated processing timelines and try to be patient while waiting. Life insurance benefits get typically paid within 30 to 60 days of the filing of a claim, but delays can arise in certain situations.
Read: How to Dispute an Insurance Claim Settlement
Insurers have up to 30 days to review the claim. After which, they can approve and begin the process to pay it out, deny it, or ask for additional information. During this time, the insurer must verify that none of the exclusions stipulated in the policy applies. Some standard exclusions could include such clauses as the one-to-two-year contestability clause or the two-year suicide clause.
Payments can be delayed if the insured party died during an illegal activity, or there was a suspicion of fraud. This delay allows the insurer time to complete a thorough investigation. Depending on the policy, several other complications can arise and lengthen the claims process for beneficiaries.
However, these are the exceptions and not the rule. For most claims, insurance companies process requests and make the payout within the typical 30-60 days.
Step 4: Get Professional Advice and Know your Payout Options
In some cases, the policy does not specify the payout method beforehand. You will have the option to decide how you will receive the death benefit payout. Depending on the policy that was purchased, there can be several different options to choose from.
The most common options are a full lump sum at once or regular annuity payments over several years. In some cases, there are also options for structured installment or partial payments over time. It’s important to keep mind that everyone’s financial and tax situation is unique. It is recommended to consult your insurance advisor, financial planner, accountant or financial professional before making a final decision on your payout options.
While life insurance payouts to beneficiaries are typically exempt from income tax, estate tax and related costs are not. Complicating things even further is the fact that estate and taxation laws depend on the jurisdiction and the type of the original policy. Regardless of what option you choose, when the money arrives, be prepared with a plan and handle it wisely.
Read: How Life Insurance Can Affect Your (or Your Beneficiary's) Taxes
Life insurance policies provide peace of mind and security for many families in the event of a loved one’s death. While quickly getting your life insurance payout can help you avoid financial hardship. Knowing what to do to expedite the process can help avoid frustration and delays. Like most things in life, communication, documentation, and a little patience can often go a long way.
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Written by Jodie L Stauffer | CFP
Jodie Stauffer is an experienced Certified Financial Planner® and the owner of JL Stauffer Financial Consulting Ltd. Prior to opening her firm, she spent over 20 years working in various retail banking, finance, insurance and leadership roles. Her vast experience brings a unique insider's perspective to various financial, insurance and wealth topics.