As you age and get more responsibilities, worrying about the financial struggle of your family after you are gone is common. Life insurance is taken to offer financial support to your beneficiaries towards after-life expenses as well as other support after you are gone. While life insurance seems like a good idea, it is common to wonder how life insurance payouts work. This payout, generally known as the death benefit, is offered to the beneficiaries of policyholders after death.
Life insurance payouts are a sum of money paid out to the beneficiaries of a policyholder when death takes place. These funds can be used to cover several expenses, such as childcare costs, end-of-life expenses, and mortgage payoff. How much death benefit is paid out depends on the type of life insurance policy. Understanding your type of policy and how its payouts work is important to help you know how your beneficiaries will be able to access the payouts after you are gone.
How Do Life Insurance Payouts Work?
There are two different types of life insurance: term life insurance and permanent or whole life insurance. These insurances both pay in different ways. Depending on which you purchase, it is important to understand how these payouts work. The following are explanations of how life insurance payouts work based on beneficiaries and type of insurance policy.
Beneficiaries
The beneficiary designation is a crucial aspect of the life insurance application and payout process. It can be an individual, multiple people, or even an organization, such as a charity. Policyholders have the flexibility to choose and designate their beneficiaries. Upon the policyholder’s death, the selected beneficiaries will receive the payout from the life insurance policy.
Term Life Insurance Payouts
Term life insurance is a type of life insurance that is only active for a limited period, usually 10 to 30 years. It has an easy payout of death benefits to the beneficiaries if the policyholder dies during the insurance policy time frame. This insurance policy only pays a small amount of the death benefit if the policyholder passes away before time.
Permanent or Whole Life Insurance Payouts
This life insurance policy lasts throughout the life of a policyholder. It has several payout processes that include additional complications, unlike term life insurance. Due to its cash value components, the following are proper explanations of how this insurance payout works:
Cash Value Components:
Over time, permanent life insurance builds up a cash value, which is used by policyholders during their lifetime. This cash value built up is tax-free and can be withdrawn or borrowed by the policyholder.
Dividends:
Some life insurance companies pay dividends to policyholders. This dividend paid can be used in several ways, including buying paid-up additions. Paid-up additions are small amounts of additional life insurance that have their own cash value and death benefits. Purchasing them increases the overall value of your life insurance policy.
Graded Death Benefit Period:
The full death benefit is available only after the policyholder passes away, following a specific period known as the graded death benefit period. If the policyholder dies within this period, the beneficiaries receive the premiums paid, plus some interest, or a reduced percentage of the death benefit.
Types of Life Insurance Payouts
Life insurance payout can be done in several ways, making it flexible for beneficiaries to meet financial needs after a policyholder dies. The following are the main types of life insurance payouts:
Lump-Sum Payment
This is the most common type of payout practiced by most policyholders. Beneficiaries get the whole death benefit in a single payment. This process offers quick access to the complete amount, which is important for covering debts and other expenses.
Installment Payments
Some beneficiaries may decide to receive the payouts in installments over an agreed time frame or throughout their lifetime. This process can provide income steadily, making financing much easier. Installment payments can be set so that a certain amount is paid monthly or yearly until the money is exceeded.
Retained Asset Account
This type of payout is when there is an interest-bearing account where the insurance company holds the death benefit and offers a checkbook to the beneficiary to withdraw money when needed. Retained assets accounts offer flexible and easy access to funds while interest is being earned.
Interest-Only Payout
An interest-only payout is a type of settlement where the insurer retains the death benefit and pays the beneficiary only the interest earned on the amount. The principal death benefit remains unchanged and can be passed on to other beneficiaries according to the original terms. However, the interest payments may be subject to taxes as regular income.
Lifetime Endowment
A lifetime endowment provides guaranteed payments to the policyholder’s beneficiaries for their entire lives. The payment amount is determined by the death benefit and the beneficiary’s age. For example, if the beneficiary passes away before the death benefit is fully paid out, the remaining balance is returned to the insurance company.
Fixed-Period Endowment
The death benefit on this type of payout is paid over a certain period, usually 10 to 20 years. If the beneficiary passes away before this period ends, their beneficiaries will continue to receive the payments left.
Life Insurance Payout Process
The life insurance payout process is very easy to follow. The beneficiaries of policyholders are required to make some financial decisions and handle some paperwork to receive the payout. The following is the process for a life insurance payout:
File a Claim
As soon as the policyholder passes away, it is important to contact the insurance company to inform them about the incident as well as file a claim. You will be required to submit a copy of the death certificate and fill out additional paperwork like the claim form. While there is no deadline for claim filing, it is advisable to file one as soon as possible.
After filing a claim, you should receive the death benefit within a month. However, due to situations like fraud, policy purchase date, policyholder murder during illegal activity, and suspected foul play, you may experience delays in payouts.
