How Does Life Insurance Pay Out? (2024)

FAQs

How Does Life Insurance Pay Out? ›

Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account. Check with the insurer to see which life insurance payout options they offer.

If the insured passes first, then the beneficiary's heirs or estate will receive the death benefit. If there are no beneficiaries left alive at the insured's death, the death benefit will be added to the insured person's estate.

Life insurance payouts are sent to the beneficiaries listed on your policy when you pass away. But your loved ones don't have to receive the money all at once. They can choose to get the proceeds through a series of payments or put the funds in an interest-earning account.

In many cases, it takes anywhere from 14 to 60 days for beneficiaries to receive a life insurance payout. But many factors impact this time frame. These include the insurance company's procedures, when the claim is filed, how long the policy was active, the cause of death, and state laws regarding insurance payouts.

What is the average life insurance payout? The average life insurance payout in the U.S. is about $168,000, according to Aflac. However, the payout of your life insurance policy will depend on the amount of death benefit that you pay for, as well as any money borrowed against the policy prior to the payout.

Distributing assets to beneficiaries

After all debts have been paid, an estate's remaining assets — minus any probate feeds — are distributed to beneficiaries in accordance with the will, or — if there is no will — by following a state's laws of succession, otherwise known as the “order of heirs.”

Many life insurance companies try to contact beneficiaries if the beneficiaries don't contact them first. The “catch” is that there's no automatic process that tells them about policyholder deaths.

You may be able to withdraw accumulated cash value, take a loan against your coverage, access a living benefit rider or sell your policy. But selling your policy is generally only recommended if you've exhausted all other options, as doing so will cost you in fees and tax payments.

When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company. Keep in mind that if you have a newer policy it may take several years before it has accrued enough value for you to borrow against.

What kind of death does life insurance not cover? ›

Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest.

The Smallest Amount of a Life Insurance Payout is Typically Around $5,000 to $10,000. These policies can often have specific purposes, such as covering funeral expenses or burial costs.

Depending on the insurer, a life insurance payout can typically be distributed in three ways: in the form of a lump sum, via a life insurance annuity, or through a retained asset account. Check with the insurer to see which life insurance payout options they offer.

The Bottom Line

If you found out relatively late that you're the beneficiary of someone's life insurance policy, rest easy—there's generally no time limit on when you can file a claim.

If you take out a $10,000 policy and name your child the sole beneficiary, when you die, they get $10,000. You can also assign multiple beneficiaries to your policy and define just how much of the policy they'll receive.

Life insurance companies make money by charging you premiums and investing some of the money they collect. They can also profit from policies lapsing or expiring.

The Bottom Line. While life insurance does pay out a death benefit when you pass away, you could also use your policy while you're alive in certain cases. You may be able to withdraw accumulated cash value, take a loan against your coverage, access a living benefit rider or sell your policy.

As a beneficiary, you have the legal right to waive the proceeds. If you decide to forgo the money, contact the life insurance company and let them know you're not accepting the money. Depending on the provider, you might need to submit a letter or complete a form.