Life insurance policies are, essentially, agreements. When you purchase a life insurance policy, you agree to pay monthly premiums and, in exchange, the insurance company pays out benefits. While benefits differ between policies, these benefits provide payouts that either help your beneficiaries reach their financial goals or provide financial protection for your family in the event of your death.
As of 2023, these payouts averaged $168,000, but this can vary among different life insurance policies. Before receiving a payout, it’s important to know how the value is determined and who is eligible to receive the payment.
Quick Links:
- What is a Life Insurance Payout?
- The Different Forms of Life Insurance Payouts
- Who Receives a Life Insurance Payout?
- Determinants of Life Insurance Payouts
- Next Steps for Life Insurance From ELCO
What is a Life Insurance Payout?
After a policyholder has passed away, the money that went toward premium payments is distributed to beneficiaries in the form of a life insurance payout. This can vary among policy types, but the purpose of a life insurance policy is to provide some financial security for those listed as beneficiaries.
These payouts are part of the death benefit, or the money reserved for beneficiaries after a policyholder passes. Though it is left up to the individual to decide what they want to do with the money, many people like to use it to cover end-of-life expenses, funeral costs, or debt repayment.
Before a beneficiary can receive their payout, they need to file a claim with the insurance company. However, there are some factors that can impact the payout process. After filing a claim, beneficiaries will need to identify a payout method, provide any necessary documents, such as a death certificate, and comply with state laws. Since every state has their own regulations regarding life insurance payouts, this can sometimes slow down the process depending on where a beneficiary is filing.
Payouts for Term Life Insurance
Term life insurance policies remain active for the length of the contract. If the policyholder passes away before the contract ends, then the beneficiaries will receive a payout from the death benefit.
Payouts for Whole Life Insurance
Whole and permanent life insurance policies also provide payouts from the death benefit, but there are other features that may be included as well. For example, if a whole life insurance policy has a cash value associated with the contract and the policyowner owes money that had been borrowed from the cash value, then that amount will be deducted from the payout.
The Different Forms of Life Insurance Payouts
There’s no one-size-fits-all option when it comes to life insurance payouts. Beneficiaries can choose how they would like to receive payouts, depending on what works best for them. Below are some more details on each form of life insurance payouts.
Lump Sum
When a beneficiary receives a death benefit, they have several options for how they would like to receive the money. A lump sum payout may be transferred to the beneficiary’s bank account, or given to them in a check.
Installments
Beneficiaries can also choose to receive payouts in installments. These are scheduled payments that occur on a weekly, monthly, quarterly, or annually. The beneficiary will continue to receive these payouts until they’ve collected all of the money from the life insurance policy.
Annuity Payout
Annuities are popular financial vehicles for retirement savings. So, it’s common for a death benefit to be issued as an annuity payout. This way, the beneficiary can receive a steady stream of income during their retirement as a result of the life insurance claim.
Who Receives a Life Insurance Payout?
Life insurance payouts are given to the beneficiaries listed on a life insurance policy. Depending on the type of beneficiary listed, the payouts may be distributed differently. Here’s what each type of beneficiary will receive from a life insurance payout.
- Single Primary Beneficiary: If there is one person, charity, or trust identified on a life insurance policy, then they will receive the policy’s entire payout.
- Multiple Beneficiaries: When more than one person is listed as a beneficiary, a percentage of the payout will be distributed to each beneficiary.
- Contingent Beneficiaries: If the primary beneficiary is deceased or unable to be located in order to receive their payout, the payout will go to someone else who has been identified as a contingent beneficiary on the life insurance policy.
- No Beneficiary: In some cases, there are no primary or contingent beneficiaries to claim an insurance payout. Instead, death benefits from the insurance policy will be paid out to the policyholder's estate.
Determinants of Life Insurance Payouts
There are many factors that play a role in life insurance payouts. The first to consider is the type of policy. For term life insurance policies, beneficiaries will only receive a payout if the policyholder passes away before the end of the contract. For whole life insurance policies, payouts will be distributed in full when the policyholder passes away since this type of policy doesn’t expire.
Another factor to be mindful of is previous cash value withdrawals. Whole life insurance products with a cash value component allow for policyholders to borrow money from their policy. If these loans aren’t paid back by the time the insured individual passes away, then that amount will be deducted from the final payout amount.
Life insurance policy owners who have additional riders might also impact the payout totals. For example, an accidental death rider pays out an additional sum of money if the policyholder dies as a result of an accident. For a return of premium rider on term life insurance policies, beneficiaries will receive a payout for the premiums that have already been paid.
A final factor to be mindful of is the policy’s face value. This is the total value of the life insurance policy but the final payout amount may be impacted by the features mentioned above, like cash withdrawals and riders. For basic life insurance policies, the face value is often the same as the payout amount.
Next Steps for Life Insurance From ELCO
If you’re looking to help your loved ones pay off debt, make contributions toward retirement, or give them a sum of money as an inheritance, then life insurance might be what you need. Payouts from whole life insurance policies are designed to provide your loved ones with financial security in the event of your death.
ELCO Mutual has a range of life insurance products to keep your family safe and secure in the future. To learn more about our whole life insurance products and payout options, reach out to one of our independent insurance agents right away!
