There are several different insurance payout options for beneficiaries, including lump sum payouts, annuity-based payouts, and specific income payouts. The type of insurance may also impact how the death benefit is paid out. Keep reading to learn more about different life insurance payouts and how they operate.
A life insurance payout is the death benefit that beneficiaries receive once the policyholder has passed away. In order to claim this amount, beneficiaries typically need to file an insurance claim and provide supporting documents like a copy of the policy and a death certificate. Claims and payouts may work differently based on the type of life policy you have.
Term life insurance is a policy that gives you coverage for a fixed period of time, such as 20 or 30 years, so beneficiaries only get the payout if the policy is active at the time of the policyholder's passing.
Whole life insurance comes with a guaranteed death benefit, meaning beneficiaries will receive the payout as long as you’ve kept up on premium payments. This policy also has cash value that you can borrow or withdraw from for any purpose. However, if you don’t repay this policy loan, it may reduce your death benefit.
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Once the claim is approved, life insurance payouts can be made all at once or in installments. Beneficiaries can choose how they want to receive the funds when they file their claim. Here are some payout options:
Choosing a lump sum payout means you receive the death benefit all at once. You can usually request a check or ask for the amount to be deposited directly into your bank account. The Federal Deposit Insurance Corporation (FDIC) only covers bank balances up to $250,000, so if a payout exceeds this sum, beneficiaries may need to divide it between two or more accounts.1
Beneficiaries can also opt for an installment-based payout model called a specific income payout, offered by many insurance companies. For instance, with an insurance payout of $300,000, beneficiaries can ask for $30,000 every year for 10 years. The insurer will typically hold the fund in an account that gains interest over the years (the interest is taxable). This is a great option for those who don't want to use up their funds too quickly.
An annuity payout also pays out the death benefit in installments. But in this case, the beneficiary's payments are lifelong. The insurance company will calculate the payment amount based on the beneficiary’s age at the time of the claim. If there is money left over when the beneficiary dies, it goes back to the insurer.
A retained asset account allows beneficiaries to withdraw from the death benefit when they need to.2 The funds will accrue interest, but beneficiaries can withdraw their balance at any time, much like a checking account. The interest that the account earns will be taxable, but the principal payout is not.
Payouts are impacted by the number of beneficiaries you choose. Many policyholders may have just one beneficiary, but some may choose to divide their insurance payout between multiple children, dependents, or charitable organizations. Here’s how payouts work for single and multiple beneficiaries:
When you have one beneficiary, this person, trust, or organization can claim and receive the full payout. They can typically decide how they want to receive the payout when they file the claim.
If you name more than one beneficiary, you will also specify how much of the payout each beneficiary receives. You may specify either a percentage or dollar amount for each beneficiary. In this case, each beneficiary files a separate claim and can typically choose their preferred payout option for their share of the death benefit.
Some policyholders also name contingent beneficiaries who receive the insurance payout if the primary beneficiaries have passed away or are untraceable. Again, if more than one contingent beneficiary has been named, each one files a separate claim and decides how they want to be paid.
Sometimes, no primary or contingent beneficiary may be alive at the time of the policyholder's death. In such cases, the death benefit will go to the insured's estate and pass through the usual probate process. The death benefit may be subject to lenders’ claims before it goes to the policyholder's heirs.
Life insurance payouts are usually not taxable. However, interest earned on a policy through a retained access account or specific income payout may be taxable. In specific cases, you may have to pay estate taxes if the life insurance payout and estate exceeds a certain amount. You can speak to a tax professional to learn more.3
Beneficiaries can usually choose their own preferred payout when they file the insurance claim. The right option may depend on their needs and life situation. For instance, a beneficiary with a mortgage may request a lump sum payout to pay off their home, but others may prefer a payout in the form of an annual income. And an older dependent beneficiary may choose to receive an annuity to supplement their pension. It may be a good idea for you to discuss payout options with your beneficiaries.
Life insurance companies usually offer a variety of death benefit payout options. Beneficiaries can generally determine the best option for them based on their life circumstances and preferences. Lump sum payouts, installment-based payouts, and a checking account-style arrangement are some options that may be available to your loved ones.
Aflac offers life insurance plans such as term life and whole insurance with guaranteed death benefits that suit a wide range of insurance needs. Learn more and get a quote today.
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1 FDIC. “Deposit Insurance At A Glance” – Published September 13, 2022. https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/ Accessed May 9, 2024.
2 Investopedia. Death Benefit: How it’s Taxed and Who Can Claim it – Updated: March 6, 2023. https://www.investopedia.com/terms/d/deathbenefit.asp
3 Ramsey Solutions - Life Insurance Payout: How Does It Work? Updated March 1, 2023. https://www.ramseysolutions.com/insurance/is-life-insurance-taxable. Accessed March 29, 2023.
Life – 68000 Series - In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400. Term/Whole Life – B60000 Series – In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Group Whole Life - Q60000 Series - In Arkansas, Policy Q60100CAR. In Delaware, Policy Q60200M. In Idaho Policy Q60100CID. In Oklahoma, Policy Q60100COK. In Oregon, Policy Q60100COR. In Texas, Policy Q60100CTX. Group Term Life Q60000 Series - In Delaware, Policies Q60200C. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
The content herein is provided for general informational purposes and is not provided as tax, legal, health or financial advice for any person or for any specific situation. Employers, employees and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac insurance coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage underwritten by American Family Life Assurance Company of New York.
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