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How Do Life Insurance Payouts Work?

Types of life insurance payout options for beneficiaries include lump sum payouts, annuity-based payouts, and specific income payouts. They can choose which type of payout to get based on their needs. The type of life insurance you have may also impact how the death benefit is paid out. Keep reading to learn more about how life insurance payouts work, some types your beneficiaries may need, and how they operate.

How do life insurance payouts work, and how long does life insurance take to pay out?

A life insurance payout is the death benefit that beneficiaries receive once the policyholder has passed away. This payout can help your loved ones meet their financial needs in your absence. 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. Additionally, how long life insurance takes to pay out can depend on factors like the policyholder’s cause of death and your state’s regulations.

Term life insurance payout

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 payout

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 withdraw funds or take out a policy loan and don’t repay it, this may reduce your death benefit.

You can check out Aflac’s term life and whole life insurance plans to learn more.

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Types of life insurance payouts your beneficiaries may need

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:

Lump sum payout

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

Specific income payout

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.

Annuity payout

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.

Retained asset account

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.

How is life insurance paid out?

Life insurance 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 life insurance payouts work for single and multiple beneficiaries:

One beneficiary

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.

Multiple beneficiaries

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.

Contingent beneficiaries

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.

No beneficiaries

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.

Are life insurance payouts taxable?

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

Which life insurance payout do I need?

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.

Get a quote for Aflac life insurance

Life insurance companies usually offer a variety of death benefit payout options. Beneficiaries can generally determine the best option for their needs 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 benefit payouts that suit a wide range of needs. Learn more and get a quote today.

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