Buying a life insurance policy is like buying a safety net for your family. You won’t be able to provide for them, so you buy a policy. The payout the policy provides will replace your income and help them stay comfortable and fed even after your death.
However, policies don’t automatically pay out right when the person they cover dies. When a family needs to file a life insurance claim, there is a process in place to help them and the insurance carrier through the payout.
How to file a life insurance claim
Filing a life insurance claim is actually a simple process. To start, you should try to track down the insurance policy that covered the person who passed away and search for the claims website of the carrier that issued it.
Today, most carriers will allow you to start your insurance claim online. However, some are still a little old-fashioned. If the carrier doesn’t accept claims online, it’s possible that you’ll need to mail or fax in physical copies of the documents they need.
Typically, there are only a few things you need in order to file a claim on a life insurance policy.
- A certified copy of the insured’s Death Certificate. You can get these from the insured’s funeral director.
- The carrier’s official Claim Form. You can often complete these online through the carrier’s website, though some carriers will need you to print the form out and file a hard copy by mail.
- A copy of the Insurance Policy. It helps to speed up the process of filing a claim if you can provide the policy number and your beneficiary information.
Depending on the carrier, you may also need to have a few other things. Some carriers require you to have the physical policy on hand in order to submit a claim. Others even request that you submit a newspaper account of the death, such as an obituary, though this is fairly uncommon.
To get started, either the agent or the beneficiary of the policy should get in touch with the carrier and provide the date and cause of death. Then, the carrier will send you a Claims Packet either via physical mail or email.
The Claims Packet contains the forms that you need to complete and a list of the necessary pieces of information you need to gather in order to submit your claim smoothly. Submitting all of the paperwork the carrier needs in one bundle will help speed up the process.
After you submit all of the information they require, the carrier will take a few days to verify the details of the insured’s death and pull together the money needed for the payout. From the moment you submit your claim to the moment you receive your payout, the process typically takes around one week, and rarely ever more than 14 days.
Why a carrier could dispute or delay your claim
Life insurance claims are normally a fairly seamless process. However, there are certain situations that might delay your claim. Most of these have to do with how the person being insured died, especially in situations where the carrier suspects insurance fraud. A claim might be delayed if any of these situations applies to the insured:
- If the insured dies within the two year “Contestability Period” after buying their policy. (This period only lasts one year in a few states.)
- If the insured’s death was caused by homicide.
In some cases, the carrier might have the ability to deny payment on a life insurance claim based on their policy’s terms and conditions. These include:
- If the insured dies by suicide within the contestability period after buying their policy.
- If the insured dies while doing something illegal, like drunk driving.
- If the insured dies within the two year contestability period due to a risky hobby (like skydiving or auto racing) that wasn’t mentioned in their initial application.
Depending on the carrier, there may also be other stipulations that could delay or halt a payout. Talk to an agent if you’d like to know exactly what is in the fine print of a family member’s insurance policy.
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How receiving a death benefit works
If you receive the death benefit of a life insurance policy, you will have the option to receive the death benefit in a few different ways.
The most common option for receiving a life insurance payout is as a Lump Sum, in which the entire face amount is paid to the beneficiary at once. This offers quick access to the funds of the life insurance policy, which allows your beneficiaries to pay off large costs like mortgages quickly, eliminating interest costs in the future. This makes lump sum payouts the best choice for most beneficiaries.
However, the benefits of a life insurance policy are also available in Installments: smaller payments over time. Getting a payout in installments means that it takes longer to get the full face amount, but because the carrier can hold on to a portion of your money for longer, they add interest to the policy’s value, like a bank. If you aren’t a savvy investor who knows how to get the most out of a lump sum through investment, an installment plan can net your beneficiaries more guaranteed money in the long run.
One thing to keep in mind about installment plans is that while the actual death benefit of a policy isn’t subject to income tax, any additional interest that builds up over time IS taxed as income. This means that while beneficiaries will receive more guaranteed money in the long run with interest, they might be able to make more by taking the lump sum and making smart investments.
Depending on the carrier the policy is placed with, you may have different options for receiving your payout. These five options are some of the most common and popular installment plans, but they may not be available on every policy.
A relatively new type of payout, some carriers have begun offering beneficiaries a checkbook linked to the face amount of the policy. Basically, the carrier holds the money in an account that you are able to withdraw from by writing checks from the payout checkbook. Because they still hold the money, the carrier can offer interest on the portion they hold until the face amount is entirely used up.
Getting your payout as a checkbook offers a lot of flexibility. You can choose to pay individual costs and accumulate interest on top of the face amount, or simply write yourself a check for the entire face amount and transfer the money all at once. However, because it’s a fairly new way of handling payouts, not all carriers offer this option yet.
By choosing Specific Income, a beneficiary can set a schedule for their payouts to be delivered annually as a set amount of extra income.
For example, if the beneficiary of a $1,000,000 policy chose to receive specific income, they could ask to be paid $100,000 plus interest annually for 10 years, $50,000 plus interest annually for 20 years, or even an amount like $33,333 plus interest for 30 years. The beneficiary sets the payment schedule and the carrier pays regularly until the money has run out.
Interest income is a great option for large policies that will accumulate a good amount of interest year over year. Basically, the life insurance carrier will hold onto the death benefit itself, but will pay the interest to the beneficiary. These payments will continue either until the beneficiary’s death or a time they set when the claim is made.
If the beneficiary sets a time to stop receiving interest payments and is alive when that time comes, they will receive the full death benefit of the policy then. If the first beneficiary dies while receiving interest payments, the death benefit will go entirely to a second “contingent” beneficiary.
For example, if a beneficiary chose to receive interest income from a $1,000,000 policy, and we assume that the interest rate stays at a clean 2%, they would receive $20,000 annually until their death, minus income taxes. When that beneficiary dies, the policy’s face amount would transfer over to another beneficiary, who can choose to receive the full face amount however they wish.
Because you’re only receiving the interest that your payout accumulates, the face amount of the policy stays intact, which can help stretch the money out for a much longer time.
Using this plan, the insurance carrier will calculate a fixed guaranteed amount of monthly income based on the death benefit amount, gender, and age for the life of the beneficiary. However, this lifespan estimate doesn’t account for things like illnesses or conditions the beneficiary already has – only their age and gender.
For example, let’s say that a 60 year old female is expected to live to 80, and they are the beneficiary of a $1,000,000 life insurance policy. She would receive a calculated guaranteed equal amount each month she lives based on her age. This payout amount will remain constant even if the beneficiary outlives the carrier’s prediction.
For the personal finance experts out there, it helps to think of this type of payout as annuity built using fixed withdrawals from the policy. This means that the insurance company will calculate the amount of payout based on her age and this amount is fixed for her entire life.
However, when the beneficiary passes away, the insurance carrier will stop payments, even if the death occurs earlier than their prediction. With this option, there is a chance that a beneficiary could lose a portion of the face amount.
Life Income with “Period Certain”
This payout option is designed to offset some of the risk involved with the Life Income installment plan in exchange for smaller individual payments.
Basically, adding a “period certain” to a payout means that the carrier will pay for either your beneficiary’s expected lifespan based on their age and gender, or for a set amount of time – whichever is longer. To offset this additional cost, carriers offer lower rates of payment.
For example: Imagine a 50-year-old received a payout as life income with a period certain of 20 years. If they died at 65, their estate would receive the regular payments for an additional five years until the period ended.
If you ever have any questions about how to handle your life insurance payout, our agents and advisors can help.
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About the writer
Eric started in Quotacy's sales department, but moved to marketing after helping hundreds of people through their life insurance buying journey. Aside from writing about buying life insurance, he also edits Quotacy's monthly newsletter, runs our YouTube channel and produces Real Life, our podcast. Eric lives in Minneapolis, where his coworkers are trying to convince him to take his humor into the spotlight. Connect with him on LinkedIn.