Understanding Life Insurance Payouts
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Key takeaways:
- Life insurance payouts don’t begin immediately, but typically occur within 60 days of filing a claim.
- Beneficiaries can usually choose to receive the money as a lump sum or get paid in installments as an annuity.
- There are no restrictions or stipulations as to how life insurance payouts may be used.
When you originally started looking into life insurance policies, you probably researched the different types of policies available, weighed how much you could afford to pay, and carefully considered who to select as your beneficiary. Chances are, though, that you spent less time thinking about how the actual payouts would work. Everyone’s experience is unique to their situation and policy. To help you navigate this process with confidence, we’ve answered four common questions about what you can expect when life insurance payouts begin.
Q
How soon can you expect payment?
A
Life insurance payouts are not immediate. Beneficiaries should not expect a check to arrive shortly after a loved one’s passing. Instead, they must first file a claim. This typically involves submitting documents that provide details of the death. It may also include sending in a copy of the policy. Once all of the necessary paperwork is received, the insurance company will then review the claim. (It’s common for states to grant firms up to 30 days to assess everything.) Most companies remit payment within 60 days, although there’s no official time frame.1
Q
Could your life insurance payment be delayed?
A
There are instances where payment may be delayed or denied. While these scenarios are rare, it’s important to be aware of them. A delay can occur if an individual passes away within the first two years of the policy. This is often due to a contestability clause, which allows the carrier to investigate whether or not any fraud has been committed. Payment can be fully denied if it is determined that the policy holder lied on their application about income, known ailments or pre-existing medical conditions, smoking, immigration status or weight. And of course, the company will not be financially liable if the deceased let their plan lapse.2
Q
How is the insurance money disbursed?
A
Beneficiaries can receive their life insurance payout in one of two ways. The most common option is to have the money sent as a one-time, tax-free lump sum. Alternatively, it is also possible to receive the payments in installments as an annuity.3 Some people see this as advantageous since the steady checks can double as a regular source of income, which can make it easier for them to manage their money. An annuity may also ultimately be worth more than the lump sum, provided the beneficiary lives a long time.4
There can be potential drawbacks to the annuity option. Depending on the size of the payment received, it can take a long time to earn the same amount as the lump sum. There’s also the chance that the beneficiary will pass away before collecting everything that’s owed. If at any point the beneficiary wishes to withdraw a sum larger than the regular payments, they are likely to face a fee for the early withdrawal.5
Q
How can life insurance payments be used?
A
There are no stipulations on how a life insurance payout may be used. The money is simply meant to provide support for the beneficiaries. They can apply the funds however they see fit. This could be for anything from covering the cost of the funeral and remaining medical bills to paying college tuition, a home mortgage or covering any other expenses.6
Signing up for a life insurance policy and taking time to understand the payout process is a smart step for any family to take. After 158 years of providing coverage for American families, John Hancock understands that it’s important to find a provider that aligns with your goals and values. That’s why John Hancock offers innovative solutions that support your financial and physical health, such as the John Hancock Vitality Program, which rewards you with lower premiums for everyday healthy choices made during your lifetime. The right policy for you should help secure your family’s financial well-being today, tomorrow – and down the road.
Citations:
1 Investopedia: “How Does Life Insurance Work?” by Gina Roberts-Grey, December 24, 2020 (updated) https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp
2 Nerdwallet: "When Life Insurance Companies May Reject a Claim" by Aubrey Cohen, August 21, 2015 https://www.nerdwallet.com/article/insurance/life-insurance-policy-reject-claim
3 Policygenius: “How Does Life Insurance Work?” by Amanda Shih & Nupur Gambhir, September 23, 2020 (updated) https://www.policygenius.com/life-insurance/how-does-life-insurance-work/
4 Policygenius: “What is a Life Insurance Annuity?” by Zack Sigel, May 29, 2020 (updated) https://www.policygenius.com/life-insurance/what-is-a-life-insurance-annuity/
5 Policygenius: “What is a Life Insurance Annuity?” by Zack Sigel, May 29, 2020 (updated) https://www.policygenius.com/life-insurance/what-is-a-life-insurance-annuity/
6 Investopedia: “How Does Life Insurance Work?” by Gina Roberts-Grey, December 24, 2020 (updated) https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp
Vitality is the provider of the John Hancock Vitality Program in connection with policies issued by John Hancock.
Insurance products are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York), and John Hancock Life Insurance Company of New York, Valhalla, NY 10595.
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