All About Life Insurance Payouts
Nov 08, 2023 By Susan Kelly

Those who choose to receive a fixed lump sum will have their whole death benefit paid out to them at once. However, if the money isn't handled properly, this popular option can be quite unsafe. Federal Deposit Insurance Corporation coverage for individual bank accounts is capped at $250,000, so diversifying your money over multiple versions may be necessary if you expect to receive a payout that surpasses this amount.

Explicit Financial Compensation: Payments can be spread over time so that your beneficiaries' share of the estate lasts as long as possible. For instance, if the death benefit was $600,000, they may ask for $30,000 annually for 20 years. The life insurance company will invest the funds, and you will be responsible for paying taxes on the interest gained.

Account for Invested Capital Remaining After Distribution: If your insurance provider allows it, you may invest your policy payout. Any interest accrued is subject to taxation, and a checkbook is provided to the beneficiary for withdrawals. The insurance company backs the funds in the account, even if they exceed the FDIC's $250,000 cap.

The Purpose and Function of Life Insurance

At its most fundamental level, life insurance functions similarly to homeowner's or car insurance: Insurance premiums are paid annually in exchange for a certain level of protection. If the policy is in force and you die while covered, your beneficiaries will get a death benefit. What sets life insurance apart from other forms is the ability to build cash value in the policy, which may be put to several different uses.

Life insurance can be broken down into two categories


Term life insurance policies protect a specified time frame, usually between one and thirty years. If you pass away during the insurance's covered term, the policy will pay out a death benefit, and your premiums will remain constant for the life of the policy. Term life insurance is similar to other types of insurance in that it provides no monetary value and only pays out if the policyholder dies.

With whole life insurance, premiums are guaranteed to be paid for as long as you do, making it the most popular type of permanent life insurance. You can borrow against your insurance's cash value or withdraw it for any reason during your lifetime. (The death benefit will decrease as withdrawals are made, and the policy must be terminated or surrendered if the cash value is depleted.) You can use the cash value as a bonus to buy a higher death benefit.

Possibilities for Receiving a Death Benefit


The beneficiary must first submit a claim to receive the payout from a life insurance policy. After receiving the completed claim form and a certified copy of the death certificate, most insurance companies will handle the claim within a few days to a few weeks. There may be a lag time in processing a claim if the policy was recently purchased and the insurance provider has grounds to suspect fraud was committed when the policy was issued.

Once the claim has been processed and authorized, the beneficiary can decide how to receive the payout. One of the following distribution methods is usually available for the proceeds: Income for life, or an annuity, is a form of guaranteed payment made to beneficiaries. Your beneficiaries' ages at the time of filing a claim and the death benefit amount are used by insurance companies as criteria for determining the amount of any payout. Unless the beneficiary elects to receive an annuity for a specified period, the insurance company will keep whatever is left of the death benefit after your death. In this situation, the leftovers will be sent to the intended recipients.

To Whom Does It Make Sense To Sell Life Insurance?

If you pass away unexpectedly, having life insurance will provide financial stability and peace of mind for your loved ones. It can assist pay for things like a funeral, any bills you and your spouse owe, and any costs related to taking care of any dependents you may have.

However, you may wonder if purchasing life insurance is a wise financial move. It's conditional. Maybe you don't need life insurance if you're unmarried, childless, and financially secure enough to pay off your debts and cover your funeral costs out of your savings. But there are times when life insurance is a necessity.

Also, remember that your heirs will have flexibility in determining how the death benefit is paid out. Chatting with your beneficiaries about life insurance payout possibilities is a good way to ensure they are prepared to make a wise choice when the time comes.