Understanding Life Insurance Payouts [2019 Guide]
No one who purchases a life insurance policy initially knows how their financial future will be, but the most anticipated outcome is a payout to the policy’s beneficiary. Since the purpose of most life insurance is to ensure that loved ones are taken care of when the policyholder dies, a payout can be a blessing in a difficult time. But how do life insurance payouts work?
What follows is a primer to the particulars of payouts.
What you will learn:
Filing the Claim
Upon the death of the injured, the beneficiary initiates the payout process by filing a claim and submitting a copy of the death certificate to the insurance company. Most states allow the insurer thirty days to review the claim, and after that time they can issue the payout, deny the claim or request more information. There is one type of insurance policy that can actually pay out before the insured’s death; in the case of an accelerated death benefit, policyholders are allowed to draw against the value of a policy in the event of a chronic, critical or terminal illness.
Factors that Affect Payouts
The chief situation that can slow down a payout is when the insures dies within two years of the policy. Most insurance policies include a “contestability and suicide period” of two years that goes into effect when the policy becomes active . If the insured dies within that period the insurer will usually slow down the process to fully investigate the information on the application. If everything is determined to be accurate, the insurer does have to pay. If the cause of death is suicide within the contestability period, the insurer can refuse to pay the beneficiary.
Who Gets the Payout?
Traditionally life insurance payouts have been distributed in a lump sum, but today a beneficiary has a range of options for receiving the money from a policy. Payouts can also come through installment payments, annuities that are guaranteed to last for the rest of the survivor’s life, interest-only payments or plans with provisions for contingent beneficiaries or payouts based on two different survivors.
Life Insurance Payout Taxation
Life insurance payments are not subject to income tax, and this tax-free status is in effect no matter how the payout is administered. The only exception is in the case of an insurance policy taken out on an employee within a business; this type of policy might be partially subject to income taxes. Even if the proceeds from insurance payouts are not taxed, however, any interest generated on the payout is taxed as ordinary income.
When a payout isn’t the best outcome
As beneficial as a life insurance payout can be for survivors in many circumstances, there are other cases where an insurance policy becomes more of a burden than a help while the injured is alive. If the circumstances surrounding the beneficiary have changed, or the premium payments have become so burdensome that the cost outweighs the future payoff, it could be that a life settlement is a course of action to explore. By selling a policy in a life settlement, the completion of the sale, while the buyer assumes the premium payments and receives the benefit upon the insured’s death.
Life settlements offer an alternative to letting a policy lapse or waiting for a payout, and professionals at Magna Life Settlements stand ready to help you or your loved ones understand the process and eligibility for settlements. Use our simple calculator today to determine if a settlement today might be a better outcome for you than a payout in the future.
 Contestability and suicide periods are regulated by state insurance las and vary depending on where you live. Make sure to read your policy carefully to determine the actual length of the contestability and suicide period.
 This material has been prepared for informational purposes only, and is not intended to provide, and should not be relief on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transactions.