How Life Insurance Payouts Work [2024]
What You Should Know
Upon the insured’s death, a life insurance payout is issued to the policy beneficiaries
Payment options include a lump sum payout for life insurance or installments
Life insurance payouts can be delayed if the claim forms aren’t filled out correctly
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
ProsCons
May be included in base policyIf not included, there will be an add-on cost
Allows a portion of death benefit to be used for medical expensesLess money is available for funeral costs after death
Money goes directly to insured or their beneficiaryAmount 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 OptionDescription
Lump sum payoutFull death benefit paid in a single tax-free payment
Annuity payoutDeath benefit paid out periodically over a set timeframe, with interest earnings
Retained asset accountInsurer 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
FactorImpact on Payout Timeline
When you file your claimTimely filing ensures faster processing
Documents requiredPrompt submission of required documents speeds up the process
Policy durationLonger active policies may have faster payout processing
Cause of deathCertain causes may require additional investigation
State lawsRegulations 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
ReasonImpact on Payout
ExclusionsPayout may be denied if the cause of death is excluded
FraudInvestigation may lead to reduced or denied payout
Missing policy paperworkLack of necessary documents slows down the claims process
Policy lapseNo payout if the policyholder stopped paying premiums
Contestability periodInitial 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.
Frequently Asked Questions
What is the average life insurance payout?
Typically, payouts average between $10,000 to as high as $168,000. However, the life insurance claim payout amount depends on the policy.
What is the most common life insurance payout?
While most people choose the lump sum payout for life insurance, some prefer to receive payments. Installment life insurance payouts allow the beneficiary to receive income for an extended period of time.
How much life insurance do I need?
The amount of life insurance needed depends on many factors, such as if you want to pay off a mortgage, pay for college for your children, or only cover funeral expenses. A financial advisor can help you determine the correct amount of life insurance for you.
Learn how to buy life insurance that fits your needs here.
Is it better to take a lump sum life insurance payment or spread it out over time?
There is no correct answer. Most people choose a lump sum payment, but choosing installments allows you to have a steady source of income for years.
Are life insurance payouts taxable?
The life insurance payout based on the policy itself is not taxed. However, a cash value life insurance policy may be taxed on the cash value portion.
What happens if there are multiple beneficiaries for a life insurance payout?
If there is more than one beneficiary, the life insurance payout is distributed according to the insured’s wishes. The life insurance payout beneficiaries must all file their own claims to receive the payout.
In the case of a life insurance payout to minors, the payout must go to a guardian until the beneficiary comes of age. Learn how to name a minor child as a life insurance payout beneficiary here.
How does a life insurance payout differ from an annuity payout?
Typically, a life insurance payout is one lump sum paid after the insured’s death. An annuity pays the life insurance death benefit over a period of time. Annuity life insurance payouts allow the beneficiaries to receive payments for a longer time period.
Can a life insurance payout be garnished for legal judgments or debts?
A life insurance payout can only be garnished if the payout goes to the insured’s estate. A life insurance payout may go to the estate if there are no named beneficiaries.
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Rachael Brennan
Licensed Insurance Agent
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
Tim Bain
Founder & Life Insurance Agent
Tim Bain is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance.
His insurance expertise has been featured in several publications, including Investopedia and eFinancial. He also does digital marking and analysis for KPS/3, a communications and marking firm located in Nevada.
Founder & Life Insurance Agent
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