Cash News
If you’re searching for information about how to file a life insurance claim, it’s likely you’re facing the devastating aftermath of losing a loved one. It can be tremendously difficult to deal with your own grief while trying to manage final arrangements.
Fortunately, life insurance policies are intended to act as a safety net during this difficult time. But getting a life insurance payout quickly is essential to smoothing the way and ensuring you and your family have the financial support you need.
Let’s take a closer look at how life insurance claims work, how to file for a death benefit, and tips for avoiding problems that could delay the receipt of life insurance proceeds.
Step-by-step guide to filing a life insurance claim
Filing a claim for life insurance is a fairly straightforward process. Here’s your guide to what the claims process involves.
In some cases, life insurance policies allow policyholders to collect death benefits or withdraw money against the face value of the policy in the event of a terminal or critical illness. This is a life insurance rider known as an accelerated death benefit that can be added to a policy.
But generally, life insurance claims are made soon after the time of death of the policy owner.
Step 1: Determine which life insurance companies to contact
Figuring out which company holds the policy is half the battle. In some cases there may be multiple policies, so make sure you’ve identified them all. Check the person’s bank accounts, safe deposit boxes, and contact employers past and present that may have provided group life insurance. Make sure you go back a year or longer since policy premiums can be paid annually.
If you still can’t locate a policy, double check with your state’s department of insurance website or the National Association of Insurance Commissioners Life Insurance Policy Locator Service.
Step 2: Get a certified copy of the death certificate
Getting a certified copy of the death certificate usually means contacting the health department or funeral home for assistance. Certified proof of death is required documentation that, in most cases, is issued by medical professionals or a coroner.
Don’t make the mistake of making a photo copy of the death certificate and calling it a day. If you’re unsure how to get a certified copy, the funeral director assisting with final arrangements can help or you can contact the state’s vital records office.
Step 3: File a death benefit claim
Most insurance companies provide claim forms to submit a death benefit claim online. If not, you can contact the claims department directly. In addition to the death certificate, you’ll usually have to provide the following documentation:
You might also be asked to specify date, place, and cause of death as well as your name if you’re the beneficiary.
Step 4: Choose your payout
Insurance companies will often ask you to choose from a payout preference on a death claim.
Lump sum
A lump sum payout is exactly what it sounds like. You’ll get all the money at once.
Specified income
The insurer may offer to pay the death benefit in installments on a schedule over a set period of time. You would have to pay income taxes on any interest earned.
Life income
Similar to an annuity, this payout option guarantees income for life but can vary quite a bit depending on the coverage amount and the beneficiaries’ age and gender.
Interest income
Sometimes you can choose to get paid interest on the policy but not the death benefit itself. Then the amount of the death benefit would go to a different beneficiary when you die.
The kind of payout that’s best will depend on your family’s financial situation, your tax burden, and other factors. Consult a financial adviser if you’re unsure which payout plan is right for you.
How long does life insurance take to pay out?
The good news is life insurance claims are typically paid rather quickly because insurance companies don’t like hefty interest charges. While the life insurance company has up to 30 days to review and accept (or reject) your claim, most specify a much shorter time frame for dispersing death benefits to beneficiaries.
For instance, AllState indicates if documentation is in order, you can expect a life insurance payout in 7-10 business days. MetLife says they pay out uncontested life insurance claims in about 5 business days, although it can take up to 10 days if more information is required to process the claim.
Is life insurance taxable?
This is the million-dollar question (in some cases literally). Will you have to pay taxes on the cash you get as a beneficiary of life insurance?
The short answer from the IRS is no. Life insurance payouts are generally tax-free for beneficiaries. The caveat is that any interest payments you receive on the proceeds are subject to both federal and state income taxes.
4 things that could delay receiving life insurance benefits
If you don’t receive a payout within the usual window specified by the life insurance company, your claim could have one of the following issues.
1. Improper documentation
As you might expect, most claims can be processed quickly as long as the paperwork is complete. But if you’re missing a key document, such as the certified copy of the death certificate, delays could occur until the issue can be resolved.
2. Beneficiary changes
It’s awkward, but the policyholder is under no obligation to inform you that you’re no longer the beneficiary. The insurance company is also legally prohibited from sharing who the beneficiary is without a court order.
3. Policy lapse
If the life insurance policy has lapsed due to late or missed payments, don’t assume you’re out of luck. Most insurance companies offer a grace period of 30-60 days on late payments so you can bring the account up to date and ask to reinstate the policy.
4. Contestability period
If the policyholder dies within a two-year window of taking out the life insurance policy, the insurance company can delay payments while they investigate or contest the claim. This is to protect the insurance company from life insurance fraud or material misrepresentation.
For example, if the insured did not disclose critical health or financial information, or the cause of death was considered intentional such as suicide or a homicide by the beneficiary, the insurance company could declare death benefits null and void.
If your life insurance claim is being contested, be sure to ask for that denial in writing. You can appeal the decision and if necessary contact your state’s department of insurance for assistance in resolving the disputed claim.
Who can be a life insurance policy beneficiary?
There are a few rules about who the person listed as the beneficiary on a policy can be. For instance, although there can be more than one beneficiary or contingent beneficiaries named, children can’t be designated beneficiaries of life insurance.
Here are a few of the people or entities who might be named beneficiaries on an insurance policy:
It’s important to note that life insurance companies aren’t required to notify beneficiaries that they’re due a death benefit. In rare cases where all the beneficiaries are deemed deceased, the life insurance proceeds go into a trust that pays off any debts owed by the estate, including estate taxes.
How does life insurance work?
Need a quick primer?
A life insurance policy is a contract between an insurance company and the insured person, specifying that a death benefit will be paid out to specified beneficiaries, usually when the policyholder dies.
There are different types of life insurance and several different ways life insurance payouts can occur.
Understanding different types of life insurance policies
There are two main types of life insurance: term life insurance and permanent life insurance. Here’s how these types of policies differ and how that might affect how much money is paid out to the beneficiary.
Term life insurance
When you think of traditional life insurance, a term life insurance policy is probably what you have in mind. This is a life insurance contract that provides coverage for a set amount of time, usually 15, 20 or up to 30 years. If the policyholder is alive at the end of the term, the insurer terminates coverage even if all premium payments were made.
Term life insurance provides assurance that the insured’s death doesn’t cause drastic and sudden changes in financial situation for the family. The death benefit can replace their lost income and be used to pay off the home mortgage or meet other temporary needs like school tuition. Because term life insurance doesn’t have a cash value, the insured can’t borrow against the policy’s death benefit.
Term life insurance is generally quite affordable, often just a few hundred dollars a year.
Permanent life insurance
There are two different kinds of permanent life insurance: whole life insurance and universal life insurance. Both types have an extra component known as cash value. As the insured, you can withdraw funds against that cash value while you’re alive. If you don’t pay it back, your beneficiaries receive a smaller payout upon your death.
Unlike term life insurance, both whole and universal life insurance provide coverage until death as long as premiums are paid and there’s no policy lapse. While permanent life insurance can be significantly more expensive than term life insurance, it is also an interest-bearing account.
While whole life insurance provides guaranteed accumulated cash value through fixed interest, universal life insurance has cash value that can fluctuate depending on the dividends and interest earned.
The cost of life insurance coverage varies widely depending on the type of insurance, the policy details, policy owner demographics like age and health, and the amount of the death benefit. According to eFinancial, an insurance marketplace, the average cost of life insurance for a healthy 40-year old who takes out a 10-year, $250,000 term policy is $15 to $17 per month.
Additional resources to understand and manage life insurance
Taking the time to gather documentation and make sure you understand the steps to filing a claim can be difficult, but there are resources available to help survivors collect benefits.
If the deceased was a veteran, consult with the U.S. Department of Veterans Affairs to understand any benefits available to you. Similarly, family members of deceased state and federal employees should contact the U.S. Office of Personnel Management.
And last but not least, if you’re struggling to parse the verbiage on a life insurance policy, consult the consumer glossary at the National Association of Insurance Commissioners for help.