Understanding Life Insurance Payouts and How They Work

Life insurance policies help protect your loved ones from financial difficulties after your death. Getting the actual life insurance payout involves some effort, though. Knowing the basics of life insurance payouts and how they work helps you navigate the process.

Life Insurance Basics

Life insurance is a type of insurance where the policyholder pays monthly for a guarantee of a specific lump sum payment after death. This type of insurance is designed to protect loved ones from unexpected costs, such as funeral expenses, and help support dependents once the family wage earner is gone. Some reasons you might want to have a life insurance policy include:

• To pay off your mortgage so your spouse is not responsible for maintaining further payments after your death
• To provide a source of income to support young children after the death of a parent
• To pay for college after a parent's death when regular parental income is no longer a possibility

What Is a Life Insurance Payout?

The payout on a life insurance policy is the payment given to beneficiaries after the policyholder's death. Often, this is a lump sum payment, but you can also set up a life insurance policy to pay out in installments or create an asset account that beneficiaries can draw from as needed.

Who Gets the Life Insurance Payout?

The payout from a life insurance policy goes to the person or people listed as beneficiaries on the policy. Most people list a spouse or child as the beneficiary, but you can also designate a parent, sibling, friend or business partner. Some people list a charity as their life insurance beneficiary. Another possibility is to designate the payout to a trust. 

Minors can't be listed as life insurance beneficiaries, so you need to designate the other parent or put the money into a trust if you intend the benefit to be used for the care of your children. 

Most life insurance policies give you the option of listing a contingent beneficiary. If the person listed as the primary beneficiary dies before the life insurance policy pays out, the contingent beneficiary would get the payout instead.

Life Insurance Payouts and How They Work

To get a life insurance payout, you have to submit a claim. Payouts are not automatic upon the policyholder's death. You need to supply proof of the policyholder's death, such as an official death certificate, along with the claims paperwork the insurance company requires. Some companies let you file for a life insurance payout online, while others require paper forms be submitted through the mail.

How Long Does It Take to Pay Out Life Insurance Benefits?

Most life insurance companies have specific time limits for making a claim. Once you submit the claim and all supporting documentation, insurance companies usually take just one to two months to process the claim.

What to Do With a Life Insurance Payout

After you receive a lump sum life insurance payout, avoid spending it right away. Contact a financial advisor to determine the best way to use the money to minimize the financial impact of your loved one's death.