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Everything you need to know about life insurance policy payouts
A death benefit can be used by the beneficiary in different ways. Learn how a life insurance policy payout works and what beneficiaries need to know.
Purchasing a life insurance policy can give you peace of mind. That’s because you know it will provide money to help support your loved ones if something happens to you.
And if you are one of those loved ones, here’s what you need to know about how a life insurance policy payout works after the policy owner — a parent, a spouse, or someone else who might have named you as a beneficiary — passes away.
In this article:
Figure out your beneficiary status
When someone buys a life insurance policy, they can choose two types of beneficiary:
- A primary beneficiary: This is the person(s) who will receive a payout from the policy when the policy owner dies.
- A contingent beneficiary: This is who will receive a policy payout if something happens to one of the primary beneficiaries.
If a policy owner names more than one primary or contingent beneficiary, they can spell out what percentage of the death benefit proceeds each will receive.
Pro tip: If you’re a policy owner, let your beneficiaries know that you’ve chosen them to receive a payout when you die.
If you are a possible beneficiary, check with your loved ones to find out whether they’ve named you a sole beneficiary, one of many beneficiaries, or a contingent beneficiary. You’ll also want to know where the policy is located so you can file a claim for a payout.
Know the death benefit amount
It might seem awkward to ask how much money you’ll receive when a loved one dies. But knowing the amount of the death benefit you will receive can help you decide on the best and most feasible uses for the money.
Also, take time to discuss final wishes in regard to funeral planning and any specific ways he or she would like the policy’s death benefit to be used.
Pro tip: Ask the policy owner whether he or she has used any living benefits riders, such as an accelerated death benefit rider, that could potentially reduce the death benefit.
Understand the different payout options
Insurers typically offer a variety of payout options for life insurance death benefits:
The entire benefit amount is paid at once by check or electronic transfer. This is the default payment for most policies, and is typically tax-free.
The beneficiary can specify a period over which to receive payments. Payments are made until the death benefit is depleted.
This option works like an annuity and allows a beneficiary to receive insurance proceeds as guaranteed income for life in fixed monthly payments.
Life income with a period certain
The beneficiary receives guaranteed payments for life or over a certain period (five, ten or 20 years), whichever is longer.
Some insurers allow beneficiaries to leave a death benefit in an interest-bearing account, then receive interest payments periodically. The original benefit can be paid to a secondary beneficiary when the beneficiary dies.
Pro tip: If you are paid in installments or receive interest on your payments, a portion of those payments or interest could be taxable. Consult with a financial professional to help you explore ways to use the policy payout while minimizing any tax implications.
File a life insurance claim
The insurance company won’t automatically pay a death benefit when a loved one dies. If you are a beneficiary, here are steps you will likely need to take to file a claim to receive life insurance proceeds:
- Get a few copies of the insured’s death certificate by contacting your county or state vital records department. Or the funeral home you’re working with can help you get death certificate copies.
- Notify the insurance company of the insured’s death. You’ll be sent claim forms to fill out and return. If there are multiple beneficiaries, each might need to fill out a separate claim.
- The insurance company will then review the claim to determine whether it will be approved or denied. The life insurance company could deny the claim, for example, if the death was the result of suicide within two years after the policy was purchased, or from a pre-existing condition that wasn’t disclosed during the application, or a cause that wasn’t covered by the policy.
- If the claim is approved, then you’ll have to decide how you want to receive the payout and what to do with the money.
Note: The life insurance claims process generally takes around two to four weeks. In some situations, it could take longer. Follow up with the insurer if you have questions or concerns.
Pro tip: Take your time after receiving a life insurance policy payout. Managing a life insurance payout while dealing with grief can be overwhelming. Working with a financial professional can help you come up with a plan for the money.
The possibilities for life insurance money
Here are some ways to use a life insurance payout:
Funerals and other costs associated with the end of life can be expensive. If you are taking time away from work to grieve, you might also need the money to cover lost income.
Every day expenses
One reason people get life insurance is to replace their income if they die, so their dependents don’t suffer financial hardship. In keeping with this, a life insurance payout can be used to pay for housing, clothes, groceries, bills, and more — often many years’ worth.
An emergency fund
One of your first priorities might be to create an emergency fund if you don’t have one already. Having cash set aside will help you avoid racking up debt to pay for unexpected expenses.
If you have high-interest debt, such as credit card debt, you could use life insurance proceeds to pay it off quickly.
If you have a mortgage, you might be tempted to use a life insurance payout to pay it off. But it may not be the best long-term choice for your finances. Discuss your options with a financial professional before making large financial decisions, especially when you are dealing with loss and grief.
You could invest in a 529 plan or other college savings accounts, some of which offer tax advantages and can even be used for private elementary and secondary school tuition.
Leaving a legacy
If your financial needs are met, you could use a life insurance payout to memorialize your loved one. You could donate some or all of the proceeds or create a scholarship fund. Or you could use the money for a family trip or reunion in honor of your loved one.
The lasting value of life insurance
A life insurance policy payout can’t bring back a loved one. But it can help you live out the dreams, goals, and wishes you both crafted, and can be a way to truly honor the life someone lived.
About Cameron Huddleston
Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Forbes, MSN, Yahoo and many more print and online publications. U.S. News & World Report named Cameron one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named me one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, MSNBC, CNN and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR and more than 30 podcasts. Cameron has also been interviewed and quoted as an expert in The New York Times, Chicago Tribune, BBC.com, MarketWatch and more.Read more by Cameron Huddleston
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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