mourning the death of a loved one is the hardest thing in the world. The last thing you want to do in the middle of this is stress about money, and that’s why your loved one had life insurance.
but trying to collect on your policy can be confusing. If you’re like most people, you have questions like: How do I claim a life insurance payment? when will the money get here? how will the money get here?
if you have suffered a loss, or are helping a loved one overcome their loss, we are very sorry. this situation is devastating and sucks. But when you understand how life insurance payments work, you can get the money you need to take care of yourself and your family during this difficult time. then let’s get started.
How long do you have to claim life insurance?
We’ll be honest: Filing a life insurance claim is important, but it probably isn’t at the top of your to-do list right after a loss. (unless you need the funds for end-of-life costs). he needs time to cry before he can put one foot in front of the other and take steps into the future. and that’s fine.
There’s no time limit on claiming life insurance, so you can do so when you’re ready. That said, your loved one left this money to take care of their loved ones. There will be costs that will need to be paid, and the life insurance payout will help cover those costs. that is the legacy that this person left you. therefore, it is best to honor your intentions and file your claim as soon as possible.
what are the payment options?
Before you get paid for life insurance, you’ll need to choose how you want to get paid. These are some of the most common options.
lump sum payments are what they sound like: you get the full payment all at once. We recommend this option because it is the simplest. plus, you can put the money to good use the moment you receive it because a lump sum puts you in charge, not the insurance company.
With an installment plan, the life insurance company pays you a certain amount of money on a regular schedule (usually monthly, quarterly, or annually). and that money is paid out over a certain period of time.
For example, let’s say Paul had a $750,000 life insurance policy. His wife Jody could ask the insurance company to pay her $75,000 a year for 10 years.
Unfortunately, there is no more money after the 10 years are up. That’s why some insurance companies offer quotes that last “for the rest of your life.” But there are some huge flaws with lifetime installment plans.
For starters, the life insurance company is just guessing how much money to give you based on how long they think you’ll live. So if your loved one dies when they are 25, you might get a couple of hundred dollars a month. that’s not even enough to cover the rent.
and regardless of your age, the reality is that life is too short. if you pass away before receiving full payment, then poof! disappears. the insurance company will keep the leftover money, so you can’t even leave it to anyone else.
Some people try to get around this by choosing a set payment period, which means the insurance company will continue to spread out the payment over a set period of time, say 20 years. if you die in that time, it will go to the secondary beneficiary listed on the original policy. if they’re still alive, that is. if not, then you guessed it: the insurance company keeps the money.
This is why we recommend lump sum payments. you take control of all the money from the start. If you invest it wisely, you’ll have plenty to live for and leave your loved ones a great and lasting legacy. when you think about the long term, lump sum payments outweigh installments!
In fact, you can let the life insurance company keep the money and invest it for you. then they will pay you the interest that the payment generates, but not the payment itself. no, we’re not making this up and yes, it’s crazy!
With this option, you have no control over your own money. that’s crazy! the insurance company chooses how to invest it, and since they’re not you, they’re not motivated to make sure you come out ahead. meaning you can’t make the right investments to get the maximum returns. Instead, you keep the bad investments they make for you, while they keep the giant payout your loved one intended you to use.
It’s much smarter to get a lump sum payment and invest it with the help of a qualified investment advisor. They can teach you how to make the most of this money so you can live the life your loved one wanted you to have.
How long does life insurance take to distribute?
The short answer is, it depends. the life insurance company has to review the claim and confirm that the policyholder is indeed deceased before distributing the money.
States know that families expect these payments, so they put in place laws that limit how long reviews can take. most states allow up to 30 days, but of course every state is different, so be sure to check the laws in your area.
once the claim is reviewed, the life insurance company may deny, delay or approve it.
Life insurance does not cover all situations, such as if the policyholder stops paying, lies on their application, or lets the policy lapse. in that case, he will receive a letter stating that the claim was denied and why. most companies will also reimburse the premiums your loved one paid up to that point.
If your claim is denied and you think it was a mistake, you may be able to contest it by using the insurance company’s appeal process or, if they don’t have an appeal process, by hiring an attorney. Fortunately, denials are very rare, so it’s unlikely you’ll have to deal with this.
Claims can be delayed for various reasons. it is usually because the documentation is incorrect or incomplete. in that case, the reviewer will ask you for more information. once it is sent to you, the claim will be approved or denied from there.
Another reason claims are delayed is if the policyholder died within the two-year contest period, which is the two years immediately after the policy was purchased.
Insurance companies created the two-year contest period because people who plan to commit fraud or commit suicide are more likely to do so during those first two years. If your loved one died under any of these circumstances, the life insurance company will most likely deny your claim.
Unfortunately, the two-year window can slow things down even if your loved one died of natural causes and you told the whole truth on your application. It can take up to a year for the insurance company to investigate and approve your claim. We know, it’s complicated and it sucks. If you have questions or concerns about a delay, please contact your insurance agent.
Finally, claims may be delayed if there are extenuating circumstances, such as a homicide. then you may not get paid until the criminal investigations are over.
The good news is that most life insurance claims are approved. You will generally receive payment within 60 days of approval. And if your claim was simple and easy to review, your life insurance payout could be distributed in as little as 10 days.
who receives the life insurance payment?
The life insurance payment will be sent to the beneficiary listed on the policy. if there is more than one, each beneficiary must file their own claim. then the insurance company will pay each person or organization the amount left by the insured.
There are some rules for recipients, so here goes:
First, we recommend that people tell their loved ones who the beneficiaries are and how much each person receives ahead of time, that way there are no nasty surprises! But if your loved one didn’t do this, keep in mind that you have no legal right to know who the other beneficiaries are. the insurance company can’t tell you who else is getting money, or how much.
Even if you know who the other beneficiaries are, you cannot file a claim for them. the only exception is if you are a financial proxy for someone who is a beneficiary. then you’ll need to talk to your insurance agent about accessing that money on behalf of the person you’re caring for.
And finally, if you’re an agent or trustee, you can’t keep any of the payment, unless the policyholder has left you an amount as payment for helping to oversee their affairs. if they didn’t, then their only responsibility is to manage that money for others.
Do you have to pay taxes on life insurance payments?
Life insurance payments are entirely income tax-free, so in most cases, you’ll get the full amount of the payment. but you may have to pay other types of taxes.
Estate taxes are pretty ridiculous – they’re basically the government’s way of swooping in and taking your money now that your loved one isn’t here to protect them, or you. You will have to pay estate taxes if the life insurance payment plus the rest of your loved one’s estate is worth more than a certain amount. in 2021, that amount is $11.7 million, so the good news is that the average person won’t have to pay these taxes.1
income taxes on interest
If you accept an interest-based payment, you will have to pay income taxes on that interest. and it is similar if you have an installment plan. With installments, money you haven’t yet received earns interest, so you’ll pay taxes on that interest.
And that’s another reason we recommend taking the lump sum: it keeps you in control of your finances and it’s tax-free!
what do you do with the life insurance payment?
There are a lot of things life insurance covers (and some it doesn’t). The important thing is that you have a plan. this is a lot of money, you have to tell it where to go, or else you’ll be wondering where it went!
First, take care of the four walls: food, transportation, housing, and utilities. You can use your life insurance payout to cover these basic needs and focus on your family, instead of rushing back to work to pay the bills.
When you’re done with all four walls, allocate the remaining money to the small step you’re working on. Depending on the amount of the payment, you can get out of debt, save and invest, and give great gifts to the people and causes that matter most to you. just make sure you take care of yourself and your family first. that’s what this money is for.
and you can continue to care for them with your own term life insurance policy. Your loved one left you money because they wanted you to live your dreams and have a beautiful life. and you can leave that same legacy for the next generation.
Get your free quote today and our Ramsey Trusted Provider Zander Insurance will help you find the right policy. therefore, you can have peace of mind knowing that the future of your loved ones is decided.
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