Life insurance payout: If I die right after buying life insurance, will my family (beneficiaries) still get paid? We answer this question in today’s episode of Q&A Fridays by explaining what a life insurance how beneficiary designation works and the contestability period for life insurance policies.
Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance agency where you can get life insurance on your terms.
I’m Jeanna and I’m Natasha.
Will my beneficiaries still receive the full payout if I die right after I buy term life insurance?
Yes, but before we get into the explanation, let’s review some definitions our viewers may not know.
Term life insurance is an inexpensive life insurance plan designed to last a set period of time and not your entire life.
And the death benefit is the amount you are insured for and therefore that cash payout your beneficiaries receive if you were to die during that set period of time.
So going back to today’s question, if a parent purchases a $250,000 20-year term life insurance policy after the birth of their child and then dies a month later in a car accident will the life insurance company still pay the death benefit?
Yes, even though the parent has only paid one month’s worth of premiums, the insurance company will still pay the full $250,000. But it won’t pay $250,000 right to the infant.
No. And it’s not recommended to name a minor the beneficiary of a life insurance policy because a life insurance company is not going to pay all that money to a minor child.
What happens is this money would get stuck in the legal system until a court appoints a guardian to manage those funds until that child is a legal adult. This court process is time-consuming and costly.
So who should the parents name as a beneficiary if their children are young?
Well, most parents name the other parent the primary beneficiary however, it’s important to name contingent, or backup, beneficiaries should the primary beneficiary and the insured die at the same time.
The contestability period means is that if you were to buy a life insurance policy and then die within those first two years, the insurance company has the right to investigate whether or not you were completely accurate on your application.
Okay, so going back to our example, if both parents died in that car crash then the contingent beneficiary will receive the death benefit.
The other piece of information we should talk about is the contestability period. And this period lasts two years and starts immediately after you buy your term life insurance policy.
And what the contestability period means is that if you were to buy a life insurance policy and then die within those first two years, the insurance company has the right to investigate whether or not you were completely accurate on your application.
For example, if you said on your application that you have never skydived before, but then you die a year later while skydiving, will the insurance company pay the death benefit?
If you have never skydived before and then buy a life insurance policy and then later on go skydiving the insurance company can’t fault you for that because you were honest on your application when you said you’ve never skydived.
However, if the insurance company investigates and discovers you’ve been skydiving as a favorite pastime for years, they are not gonna pay that death benefit claim. It doesn’t pay to fool the life insurance company.
Is there anything else our viewers need to know about term life insurance and death benefits?
Well, similar to the two-year contestability period, every life insurance policy in the fine print has a suicide clause. And this clause also lasts about two years. And what this means is that if you were to buy a life insurance policy and commit suicide sometime within those first two years, the insurance company does not need to pay your beneficiaries the death benefit. What happens is that what they would only pay the premiums you’ve paid thus far.
Good to know.
Yeah, and this clause not only protects the insurance company but families as well.
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If you have any questions about life insurance or a life insurance payout, make sure to leave us a comment. And if you have any questions regarding today’s topic, check out this blog: How Do Life Insurance Policy Payouts Work? Otherwise, tune in next week when we discuss what happens if you outlive your term life insurance policy. Bye!
About the writer
Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series
Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.