Planning for things like death is never easy, but it is one of the greatest gifts you can offer your loved ones. Read on to learn more about how life insurance works, the different payout options and any tax implications.
How Does Life Insurance Work After Death?
A life insurance policy pays out a death benefit when an insured person dies, which for many families, brings some peace of mind during a stressful time. You may have young children whose education you’d like to pay for, or your spouse may need help to pay off a mortgage or other debts.
Life insurance payouts are sent to the beneficiaries listed on your policy when you pass away. Following the death of an insured, it is important to contact the life insurance company as soon as possible to begin the claims process. Life insurance companies will likely require paperwork and supporting evidence to process the claim and payout.
If you are the beneficiary of the policy, you may have to provide a copy of the policy with the claims paperwork. They’ll also want a certified copy of the death certificate. You’ll also need to provide a signed statement of claim, which is sometimes called a request for benefits.
How Long Does It Take for Life Insurance Benefits to Be Paid?
Life insurance benefits are typically paid when the insured party dies. After a beneficiary files a death claim, most states allow insurers 30 days to review the claim, after that they can pay it out, deny it or ask for additional information. If a company denies your claim, they generally provide a reason why. Most insurance companies pay within 30-60 days after the claim is made. Different things can cause a delay in payment. Make sure you talk to your agent to understand situations that would delay your insurance payment.
What Are the Different Life Insurance Payout Options?
When you purchase your life insurance, you can decide how your death benefit is paid out. Talk to your agent to go over what the best option is for you and your loved ones:
- Installments and annuities payout the proceeds and accumulated interest regularly over the life of the beneficiary. This allows you to select a guaranteed income stream between five and 50 years, or even guaranteed income for life. This is a good option for income-protection, but keep in mind that any interest income is subject to taxes.
- A lump sum, which allows the beneficiary to receive the money in one large payment, is the default payout option for most policies.
- Some insurers offer a retained asset account, which functions as a checking account for the beneficiary. The insurance company holds the payout in an interest-accruing account and recipients can write checks from the account.
- Pre-death benefits allow you to draw against the face value of your policy in the event of a terminal, chronic, or critical illness. Policies with these provisions accelerate the payment of the death benefit to you, while you are still alive, effectively making you the beneficiary of your own policy.
Are Life Insurance Proceeds Taxable?
The death benefit from a life insurance policy is typically tax-free, especially when it comes to a lump sum payout. However, there are exceptions, and any interest you earn on a death benefit is taxable. If you’re receiving installment payments, expect to report some income on your taxes.
Farm Bureau Can Help
Talk to your Farm Bureau agent to ensure you have the best life insurance payout option for you and your family’s needs.
Neither the Company nor its agents or advisors give tax, accounting or legal advice. Consult your professional advisor in these areas.