How do Life Insurance payouts work?

Life insurance is an essential part of your long term financial planning. But to effectively utilize this in your portfolio, you need to understand how and when payouts are delivered to beneficiaries.

When are payments made?

Most insurance companies pay within 30 to 60 days of the date of the claim. When the insured has died, and the beneficiaries file a death claim with the insurance company. Many provinces allow insurers 30 days to review the claim. Then they can pay it, deny it or ask for additional information.

Why would a payment be delayed?

Is the policy less than two years old? There is in most policies a two-year contestability clause. This allows the insurance company to further investigate the application to ensure that no fraud is being committed. This may take 6 months to a year to investigate. If the insurance company is unable to prove the insured lied on the original application, the benefit will be paid.

Did the insured commit suicide?

Many policies contain a suicide clause that allows the insurance company to deny a claim if this happens in the first two years.

Was the cause of death homicide?

In these cases, your insurance company will communicate with the police detectives investigating this case to rule out the beneficiary as the suspect. If the beneficiary is found to be the suspect, payment will be withheld until they are no longer a suspect, the charges are dropped, or they are acquitted of the crime.

How is the payment made?

Most policies have a lump sum payout that is paid tax-free and avoids being withheld while the insured finances and taxes are being completed.

Can payments be made over time?

There are some options regarding the payments issued to the beneficiaries such as instalments or annuities. This allows the insured to make payments over the lifetime of the beneficiary. This gives the insured an opportunity to select a guaranteed income stream instead of a lump sum payment.

What if the insured needs money before they die?

Normally, insurance policies are paid upon the death of the insured. However, some insurance companies have designed policies where the insured could withdraw money from the face value of the policy in the event of terminal illness. This allows the insured to use this money while they are still alive but reduces the policy amount available to the beneficiaries upon death.

When do I file a claim?

The insurance company and your financial advisor should be contacted as soon as possible to begin the claims process. The insurance company will request paperwork including a certified copy of the death certificate. This can usually be supplied by the hospital or nursing home where the insured died. This, along with a “request for benefits” statement, will be submitted and your claim will be processed. To avoid delays, ensure the information is complete and accurate when submitting documentation or communicating with the insurance company. Your life insurance agent can help you with this process.

Why is life insurance an important part of my financial portfolio?

Simply put, life insurance policies offer both the insured and the beneficiaries peace of mind in the event of financial difficulties arising from a person’s death.