Losing a family member can be really hard. Late last year, my father died from prostate cancer, leaving a big hole in our hearts. But he did one very good thing for my mom decades before finding out he had cancer. He signed up for three life insurance policies that added up to a significant payout.
While I've written dozens of articles about life insurance and know the processes well, this was my first time actually going through the steps of collecting life insurance. I learned a few new tips to make the process easier while doing it myself.
Here's what everyone should know about collecting life insurance when someone dies.
How life insurance payouts work
Death benefit
A death benefit is the lump sum paid out by the insurance company upon the insured person's death. Your death benefit is equal to your chosen coverage amount.
Beneficiary designation
It's important to check that your listed beneficiaries are correct. This ensures that your payout goes to the right people. If you've undergone a significant life change that requires modifications in your beneficiary, like a divorce or marriage, be sure to update your policy as soon as possible.
Insurers will also ask for your preferred payment method. One of the most important areas on each claim form asked how my mom wanted to be paid, as she was the listed beneficiary on each policy. She opted for direct deposit where it was available, as it's a secure way to get paid as quickly as possible. Direct deposit is much more secure than the mail, where checks may be lost or stolen.
Before my dad's death, we opened a new online checking account and investment account in my mom's name. We used her new checking account for the payments.
Life insurance claims process
Most of the information required on each claim form was simple and straightforward. We needed my parents' contact information, my dad's Social Security number, and basic information about his death. There were no tricks or hoops to jump through, though the long forms were tedious.
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Types of beneficiaries
Primary beneficiary
A primary life insurance beneficiary is the first person or people first in line to receive the payout — often the policyholder's spouse or children. You could choose multiple people and specify how you'd like to divide the proceeds.
Contingent beneficiary
A contingent beneficiary receives the payout if the primary beneficiary cannot, such as if the primary beneficiary passes away. A contingent beneficiary may be a close relative or a friend.
Trust as beneficiary
You could also list a trust as your policy's beneficiary. Children under 18 can't receive benefits directly. So, you must assign a legal guardian or create a trust for the minor and appoint a trustee to manage the funds until the child reaches legal age.
Additionally, say the beneficiary cannot manage the money, for example, if they are lifelong or special needs dependents. Then, you can establish a trust under your beneficiary's name and designate a trustee to oversee the assets and disburse the funds.
Factors affecting payout amount
Policy type
The primary difference between term and permanent life insurance payouts is their expiration date. If you die after your term life insurance expires, your beneficiaries won't receive the policy payout. Permanent life insurance lasts forever, so your beneficiaries are guaranteed to receive your death benefit as long as you pay your premiums.
Additionally, if you have a policy
Policy riders
Different life insurance riders can also impact your policy payout. For example, riders like accidental death benefits pay an additional death benefit if the policyholder dies due to an accident like a car crash or drowning.
Outstanding loans
If you have a permanent life policy, it builds cash value, which you can borrow from. If you fail to pay back your life insurance loan with interest, the outstanding amount may be deducted from the death benefit. This lowers the payout your beneficiaries get.
What to expect when filing a claim
Contact the insurance company
Financially savvy people may be able to skip to the next step, but my mom and I found it easiest to call each life insurance company to notify them of the death and ask what forms were needed. That way, we didn't have to guess and risk filling out the wrong form or missing something important.
In all three cases, the insurance companies were friendly and helpful. They were able to email me copies of the claim forms that we could fill out on the computer or by hand. Each insurer has different rules about death certificates — some want notarized originals, while others take photocopies or scans.
Gather documentation
Once you've dotted your i's and crossed your t's, you can send in your claim form and any required supporting documents. We asked for eight copies of my dad's death certificate just in case we needed extras. Two of the three life insurers wanted original copies, while the third was happy with a scanned copy submitted via email.
Follow any directions on the claim form closely to ensure your payment is sent out as quickly as possible. If you forget anything, it can take weeks for them to ask for missing documents, you send them in, and they take time to process and review everything again.
Timeline
Hopefully, you'll see the money in your account within a few weeks. If it takes more than two or three weeks, you should consider contacting the insurer to ensure your forms have been received and nothing is missing.
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FAQs
Is life insurance payout taxable?
Life insurance payouts aren't taxable in most cases, but any interest accrued on it will be. If you have a large estate, estate taxes may apply.
Can I get the payout faster?
You can get the payout faster if you have an accelerated death benefit rider. In some cases, insurers may offer accelerated death benefits for terminal illness or financial hardship.
What if I can't find the life insurance policy?
If you can't find a life insurance policy, reach out to the deceased person's insurance agent, financial advisor, or employer. You can also contact state insurance departments or search the National Association of Insurance Commissioners (NAIC) Life Insurance Policy Locator Service.
