How Life Insurance Payouts Work [2024]

The life insurance payout is available to the beneficiaries in the event of an insured’s death. However, the way the payment is disbursed varies. Whether you choose a lump sum or annuity payment, you may have to pay taxes on the death benefit.

Keep reading to learn how life insurance payouts work and how to file a life insurance claim.

Understanding How a Life Insurance Payout Works

Beneficiaries may file claims after the insured’s death to begin the payout process. The type of policy in place determines several factors, such as taxes and how the life insurance death benefit pays.

For example, a traditional term life insurance policy usually pays the benefit in a lump sum. The beneficiary doesn’t pay taxes on the payout.

However, permanent life insurance has a cash value portion that can complicate payouts. While the policy amount isn’t taxed, any cash value accrued is taxed. In addition, living benefits life insurance allows the insured to use all or some of the cash value for various reasons, like medical needs.

This table details the advantages and disadvantages of life insurance with living benefits.

Life Insurance with Living Benefits Pros and Cons

Pros	Cons
May be included in base policy	If not included, there will be an add-on cost
Allows a portion of death benefit to be used for medical expenses	Less money is available for funeral costs after death
Money goes directly to insured or their beneficiary	Amount is based on medical condition not financial need

Your life insurance can be cashed out if you remove the entire cash value of the policy. While the policy may remain active, the death benefit will be reduced.

Many people choose term life insurance, which is only in effect for a specific amount of time and has no cash value. However, rates are typically cheaper for term life than for a permanent policy.

This table shows average term life insurance rates for different ages and payouts.

Term Life Insurance Monthly Rates by Age: Coverage Options and Pricing Comparison

Age	$100,000 Policy	$250,000 Policy	$500,000 Policy
25 Years Old	$11	$13	$21
30 Years Old	$11	$14	$22
35 Years Old	$11	$14	$22
40 Years Old	$12	$17	$26
45 Years Old	$14	$21	$34
50 Years Old	$18	$29	$50
55 Years Old	$23	$39	$70
60 Years Old	$32	$61	$87
65 Years Old	$44	$92	$178

Many factors, such as age, medical history, and habits, affect insurance costs. Compare life insurance quotes from multiple companies to find the cheapest rates available.

Learn more about how life insurance works here.

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Types of Life Insurance Payouts

There are multiple ways for beneficiaries to receive a life insurance payment. While many people choose to receive a lump sum, it may be more beneficial to receive payments for an extended period of time. In many cases, the type of life insurance policy dictates whether you have to pay taxes.

For example, permanent life insurance typically has a taxable cash value, but the life insurance policy coverage amount is not taxed.

This table shows ways to receive a life insurance payout.

Life Insurance Payout Options

Payout Option	Description
Lump sum payout	Full death benefit paid in a single tax-free payment
Annuity payout	Death benefit paid out periodically over a set timeframe, with interest earnings
Retained asset account	Insurer holds the benefit in an interest-bearing account for withdrawal as needed

While there are multiple ways to receive a life insurance payout, the type of policy and insurance company may restrict your chosen method. Remember, if you select an installment life insurance payout, you may have to pay taxes on earned interest.

In addition, life insurance policies that generate immediate cash value are also subject to taxes on the cash value.

The Life Insurance Payout Process

There are life insurance payout steps to ensure your claim is processed promptly. The specific steps vary by insurance company, but filing your claim as soon as possible is essential. Fill out the form entirely and include a copy of the death certificate.

This table shows how your life insurance payout timeline may be affected.

Factors Affecting Life Insurance Payout Timeline

Factor	Impact on Payout Timeline
When you file your claim	Timely filing ensures faster processing
Documents required	Prompt submission of required documents speeds up the process
Policy duration	Longer active policies may have faster payout processing
Cause of death	Certain causes may require additional investigation
State laws	Regulations vary, which can impact the timeline

Check with the insurer if the payment process is moving too slowly.

How a Life Insurance Payout Can Get Delayed

There are many reasons the insurer may delay your life insurance claim payout. This table shows common reasons you may have to wait to receive the payout.

Reasons for Delay or Denial of Life Insurance Payouts

Reason	Impact on Payout
Exclusions	Payout may be denied if the cause of death is excluded
Fraud	Investigation may lead to reduced or denied payout
Missing policy paperwork	Lack of necessary documents slows down the claims process
Policy lapse	No payout if the policyholder stopped paying premiums
Contestability period	Initial two years may involve review, but honest claims proceed

While some factors, such as exclusions, are out of your control, be sure to follow directions from the insurer to move through the claims process as fast as possible.

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Tips on Getting Your Life Insurance Payout Quickly

Ways to receive a life insurance death benefit quickly include:

• Call the life insurance company to inform them of the insured’s death.
• Fill out paperwork in a timely manner and submit any documents, such as the death certificate.
• Respond to the insurance company quickly if they need additional information.
• Follow up with the insurer if the process is taking longer than expected.

Typically, life insurance death benefits are paid in four to six weeks. However, your state determines how long an insurance company can take to close a life insurance claim.

The Best Way to Use My Life Insurance Payout

The best way to use a life insurance payout is up to you. However, common ways to use the repayment include:

• Debt payoff
• Paying for your children’s education
• Putting the money aside in an emergency fund
• Buying your own life insurance

Once you receive the life insurance payout, you may use it however you wish.

Remember, life insurance is an asset if it includes a cash value, and you may have to pay taxes. So, possibly, you will have to use part of the life insurance payout to cover taxes.

The Bottom Line: Life Insurance Payouts

There are multiple ways to receive payouts from a life insurance policy, including a lump sum payment or annuity life insurance payouts. The policy and insurer may determine which payout method you can choose.

When you purchase a life insurance policy, consider the coverage you need, your beneficiaries, and how you want the death benefit disbursed.

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