In order to best incorporate life insurance into your estate planning, you've got to know how the life insurance payout works. Here are three things to know about life insurance benefit payouts:
When They're Paid
The name sort of gives it away: life insurance benefits are paid when the life being insured ends. The beneficiaries file a death claim with the company carrying the policy and submit a certified copy of the death certificate. Although there is no set time frame for how long a claim can take, most claims will be paid in 2-6 weeks. However, insurance companies will be motivated to get the claim paid as soon as possible to avoid any related costs, like interest, and lawsuits for breach of contract.
When Delays Could Happen
Homicide. The nature of the death can lead to a substantial delay in payment. If the death is caused by a homicide, a more lengthy investigation into the nature of the death may be made by the insurance carrier, especially is a beneficiary is a suspect in the homicide.
Two Year Contestability Clause. If the insured life ends in the first two years after the policy was issued, the carrier is allowed to investigate the original application to make sure there was no fraud committed in the application process. If the insured lied on the application, the benefit can be denied. A good example of this is the insured representing to the insurance company that he has never had cancer, but then dying of cancer within the next year, which had existed since before the application was filed.
When most people think of life insurance payouts, they think lump sum. However, beneficiaries can receive the benefit in installments or convert the benefit to an annuity to maximize the lifetime value of the benefit. This may be more beneficial for younger beneficiaries hoping to capitalize on long-term interest, or if there isn't a pressing need to receive the benefits all at once.
The life insurance company should be notified as soon as possible following the death of the life being insured, to get the ball rolling on the claims process. Review the underlying policy for the specific claims process required by your loved one's policy, or contact the agent you acquired the policy from.
Paul A. Yokabitus