Life insurance claims. A complete guide.
Life insurance claims
When purchasing life insurance, the involved parties need to understand the process of receiving death benefits.
Life insurance benefits can be invaluable during a difficult time, but how do life insurance claims work?
We will examine the life insurance claims process in this guide.
Table of contents
- What is a life insurance payout?
- How do life insurance payouts work?
- When should you contact the insurer?
- The life insurance claim process
- Potential issues with life insurance claims
- Life insurance claims FAQ
What is a life insurance payout?
A payout is a sum of money that is paid to a beneficiary (or beneficiaries) when the policyholder dies, as agreed by the insurance provider and the insured’s contract.
The policyholder determines how much money their loved ones (or beneficiaries) would need if they were no longer around.
How do life insurance payouts work?
Many life insurance policies are usually paid to beneficiaries in one lump sum once the claims are approved. However, they may also have the option of an annuity or retained assets.
We will examine the different payout options in this guide.
When should you contact the insurer?
If you want to make an insurance claim to receive a payout, you should contact the insurance company after the insured person’s death.
It’s best to allocate time to find the supporting documents for your claim. We cover this step-by-step process in detail below.
The life insurance claim process
Step 1: Determine which life insurance company to contact
The insured should let the beneficiaries know that the life insurance policy is in place. Otherwise, the beneficiaries won’t know that they are due to receive a death benefit.
A life insurance company doesn’t automatically make a death benefit payment when a policyholder dies — the beneficiaries must file a claim.
It will help if you determine which life insurance company you have to contact. Knowing who to contact helps you avoid issues in filing a claim.
If you were unaware of a life insurance policy, review the person’s bank accounts and canceled checks to see if there are payments to a life insurance company. Review their records for policies, including safety deposit boxes.
You can also contact the person’s previous employer to find out if they had a group life insurance policy through the company.
Step 2: Obtain multiple death certificates
You will need a certified death certificate when filing a claim; obtaining multiple copies is best. You may need extra death certificate copies to close the deceased’s accounts.
The funeral director may be able to help you get a copy of the death certificate, but it’s pretty straightforward for a local health department to obtain copies.
The life insurance company will likely want a certified copy rather than a copied version.
You can call your insurance agent, who can act as an intermediary with the insurance company.
Step 3: File the claim
You can file a life insurance claim once you have the death certificate. This process is often available to begin online, but you should contact the life insurance company directly if that isn’t an option.
In addition to providing the insurer with the death certificate, you will need to provide the following:
- Your name
- Name of insured
- Date of death
- Cause of death
- Place of death
The life insurance company will review the claim with that information.
Step 4: Choose how you will receive the death benefits
You can often choose how to receive a life insurance payout in one of the following ways.
A lump sum
This option gives you the whole amount in one lump sum. A life insurance benefit is generally tax-free, so you don’t have to worry about taxes.
The insurer can pay you the death benefit over a certain timeframe according to the agreed schedule. Keep in mind that the interest earned would be taxable.
This payment option gives you a guaranteed income for life. The amount you receive depends on the death benefit, your gender, and your age at the time of the insured’s death.
This option involves the insurance company holding the proceeds and paying you interest instead of the death benefit. The death benefit remains intact and goes to another beneficiary upon your death.
Potential issues with life insurance claims
Filing a claim is usually straightforward, but you should be aware of potential problems and setbacks.
There may be circumstances when your claim is denied. Here are a few of the potential problems you might face.
The insured stopped making payments
There is always the chance that the policyholder stopped paying their life insurance premiums and let the policy lapse in the final months of their life.
In this case, insurers often offer a grace period of 30 to 60 days when you can “reinstate” the policy.
You are no longer listed as the beneficiary
You might discover that the policyholder changed their mind about having you as a beneficiary.
The insured isn’t obligated to tell you if beneficiaries have been changed, nor are the insurance providers. Finding out who the beneficiaries are would require legal action.
Life insurance companies cannot disclose this information to people not listed in the contract.
Even if you go to court, you might only be successful if you prove that a beneficiary change occurred unethically or someone influenced the decision for their gain.
The insured dies during the contestability period
You might discover that the insurer is using the two-year contestability period, which is often the case if the insured didn’t provide accurate information when applying for the policy.
For example, suppose the policyholder failed to report that they were a heavy smoker and died of lung cancer within the contestability period. In that case, the insurer has the right to void the policy.
The policy can also be void if the cause of death was suicide within the first two years after the purchase.
The contestability issues are generally null after the two-year window, and there’s no time limit on receiving the payout.
Life insurance claims FAQ
Here are several of the most frequently asked questions about life insurance claims.
Does life insurance actually pay out?
Yes, life insurance does usually pay out. However, only if the claim is valid. The claim is valid when:
- The premium payments are up to date
- The insurers have accurate information from the insured
- Other terms regarding the cause of death (such as suicide) may apply.
What if the life insurance claim gets rejected?
The insurance company can reject a claim. In most cases, this happens if the insured failed to provide accurate or truthful information when taking out the policy.
Another common reason a claim may get denied is if the insured’s policy was inactive at the time of death and they stopped making payments.
Most life insurance policies include contestability periods, sometimes up to 2-years after purchasing a policy. The insurance company can contest a claim within that period.
You should ask for the denial in writing if your claim gets denied. You can then appeal the decision with the information and documentation to support the claim.
You can contact your local Department of Insurance for guidance if you cannot resolve the dispute.
Do I get the cash value from the life insurance when I make a claim?
Cash value policies contain an account that accrues cash over time. However, the cash value generally reverts to the insurance providers when the insured person dies.
In most cases, the beneficiary receives the face value of the policy minus any withdrawals and outstanding loans that the policyholder made.
It’s sometimes possible to buy a policy that pays out the cash value plus face value, but the policyholder would have had to choose that option at the time of purchase.
For the beneficiary to receive the cash value, the policyholder would need a policy that pays out the cash value plus face value.
How long does it take to receive the payment?
You can receive a life insurance payout in under one week, assuming you have successfully submitted all the paperwork. In most cases, the death benefit will be paid within 30 days.
How do I know if a term life insurance policy has expired?
As a beneficiary of a term life policy, you must begin a claim filing process to determine if the policy is still in force.
It’s best to verify this even if the policy has expired. The policyholder might have renewed it past the original expiration date.
The beneficiary should contact the life insurance company following the insured’s death as soon as possible to begin the claims and payout process.
Assuming the claim is successful, you can receive a life insurance payout in under one week. In most cases, the payment will be made within 30 days.
A beneficiary may receive a payout in different ways, including a lump sum, specific income, life income, and interest income.