Understanding Life Insurance Payouts
No one who purchases a life insurance policy knows exactly how the policy will ultimately play out, but the most anticipated outcome is a payout to the policy’s beneficiary. Since the purpose of 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:
Filing the claim
Upon the death of the policyholder, 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 can affect timely payouts
The chief situation that can slow down a payout is when the insured dies within two years of the purchase 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 policyholder 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.
How the beneficiary is paid
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.
Tax implications of insurance payouts
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.*
Optimizing a payout
A beneficiary might need to use the money from a death benefit to pay off debt, fund an educational goal or create a fund to help pay basic living expenses. The time immediately after the death of a loved one is stressful and often chaotic, and a trusted advisor can help a beneficiary navigate the financial challenges of that time and provided guidance about the best way to get the most benefit out of the insurance payout.
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 policyholder 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, seniors may find that a life settlement is the best course of action. By selling a policy in a life settlement, the seller is free from the policy’s premiums and receives a cash windfall upon completion of the sale, while the buyer assumes the payments and receives the benefit upon the insured’s death.
Life settlements are an increasingly favorable alternative to letting a policy lapse or waiting for a payout, and experts 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.