Most beneficiaries will be surprised to learn that they now have a number of options for how the life insurance benefit is paid. Traditionally, when a death occurs and a there is a payout under a policy, it's done as a life insurance lump sum payment. Over time, both consumers and financial advisors have expressed concern about this method of payout as not necessarily being in the best interests of the beneficiary. In recent years, there have been changes made to life insurance policies that now give payout options.
Before we look at the types of payout options let’s start with the basics of making a claim and when the beneficiary can expect to receive the money:
When Will A Life Insurance Policy Death Benefit Be Paid?
How quickly the death benefit is paid after the policyholder passes away depends on a number of factors. For the claim to even start processing the beneficiary must contact the insurer and file the claim paperwork. Once the claim is received most states will allow the life insurance company up to 30 days to review the claim to ensure that it is valid and meets the policy’s terms. The insurer will respond in one of three ways: they’ll approve the claim, deny the claim, or ask for additional information.
The request for additional information can slow the process down so it’s in the claimant’s best interest to be as quick and thorough as possible when providing answers. There are many reasons that the insurer may require more information, such as when the policyholder has passed away within the first two years of coverage. When this happens it triggers a clause in the policy contract that allows the insurance company to conduct additional checks to ensure that the policyholder provided truthful information on their application and the death meets policy requirements.
Another situation that can delay the payment of the death benefit is when the policyholder’s death is deemed a homicide. When this happens the insurer will hold the death benefit until the beneficiary is cleared of any involvement in the murder.
However, for most making a claim is a quick and simple process. Once the claim is approved the insurer will generally pay the death benefit within a few weeks.
Understanding The Death Benefit Payment Options
Life insurance death benefits were traditionally paid as one lump sum but for some people this lump sum payout did not make sense for their life situation or finances. To help combat this issue you’re now no longer restricted to life insurance with a lump sum payout, in fact many life insurance companies now offer a selection of death benefit payment options. When you purchase a life insurance policy these are the different choices that you may see for payout options:
Life Insurance With Lump Sum Payment
While there are now other options available, the traditional lump sum payment is still a popular choice. In fact, it can be difficult to predict what the future holds for a beneficiary and setting up life insurance with a lump sum payout gives a spouse or other survivor options. Many financial advisors today recommend a payout option other than a lump sum.
Life Insurance Income Stream Payment
According to the 2016 LIMRA Insurance Barometer Study, consumers under the age of 40 would rather receive a life insurance policy payout as a continuous income stream as opposed to a lump sum payment. The study found that 61 percent of consumers were purchasing insurance to replace lost income, and 4 in 10 who are under the age of 40 would prefer a monthly benefit payout. There are several types of income stream payment options with a life insurance policy.
"Life Income" provides that the beneficiary will receive monthly payments in a fixed amount for as long as they live. Life income can also be agreed to with a certain number of years on the payout, which will adjust the monthly payout up or down depending on the term length. A "Joint and Survivor Life Income" payout will guarantee payments to either one or two beneficiaries for as long as the last beneficiary is still alive. A "Specific Income" policy allows you to select how much monthly income you would like for your beneficiary to receive and this is what will be paid until the death benefits are exhausted.
Other Types of Life Insurance Payouts
There are several other types of life insurance payment options that don't fall into the two categories we've just mentioned. An "interest only" payout provides that just the earned interest is paid for a certain period, and then policy proceeds are paid later under another arrangement or can often be demanded by the beneficiary at any time. It may also be possible under some policies to receive advanced payment of life insurance proceeds.
Selecting the right payout method depends on your preferences and your beneficiary's future needs.
Choosing A Life Insurance Payout Option
Before choosing a payout option for your life insurance policy, carefully evaluate your financial needs and the future needs of your beneficiary. It might also be useful to consult a financial advisor or tax specialist to determine the implications of each choice.
It’s also important to note that you do not need to choose a payout type when you purchase a policy. You can simply choose to provide a life insurance plan that offers multiple payout options so that your beneficiary can make the decision based on their financial situation at the time of your passing.
Contact us with any questions about life insurance payout options or to start your quote with our simple process.