With a life insurance payout, you are able to use that money for whatever you find necessary to purchase once you receive it. In other words, you can use it for anything. Life insurance payouts are a great way to find peace of mind after a loved one is to pass away. It gives your family the financial protection that is needed for potential funeral costs, living expenses, or even plan for their financial future if anything was to happen to you.
Before receiving a life insurance payout, understanding how a life insurance policy payout works is critical before making financial plans. It is also important to consider how life insurance proceeds will be used if the need was to arise. In this blog, we will discuss how a life insurance payout works after the policy owner is to pass away, how it is able to be used, and how the policy payout may be able to make certain decisions down the road a little bit simpler and easier to conduct.
Understanding Beneficiary Status
One of the first aspects to consider when discussing life insurance proceeds is whether or not you are the sole beneficiary of a loved one’s policy – or if you are listed as one of the multiple beneficiaries on the policy. A sole beneficiary would include a spouse or loved one that is listed within the policy, and multiple beneficiaries may include children or other members within the family.
Understanding the beneficiary designation on the policy will aid in the reduction of confusion over who is able to access the death benefit. Ensuring that your life insurance policy is clear and concise will eliminate any family members from arguing over who is entitled to the policy. Let your beneficiaries know that they are named and their status within the life insurance policy. Also, make sure that their identifying information is also up to date on the policy.
Make Sure the Payout Amount is Clear to Everyone
Understandably, discussing the payout amount that is owed to the individuals that are listed is extremely important. This is because as a beneficiary, you have to determine what is the absolute best use for life insurance proceeds. The first and sole reason for receiving life insurance proceeds is to pay for funeral and burial costs.
With an average funeral costing around $7000, life insurance is there to help you pay for those expenses that will come about. You may want to contact the insured person and ask them how much coverage they have purchased. If it is someone that you are close to, this could also be a good time to discuss their wishes about their funeral planning or any way they would like the money to be spent.
Understanding Payout Options
Life insurers and policies offer various options in terms of receiving life insurance proceeds after a loved one has passed away. These payments include a lump sum payment, installment payments from an interest-earning account, or an annuity option – which provides income for your lifetime.
The payout option is entirely your choice and many individuals choose to receive a lump-sum payment. Having said that, if a survivor is overwhelmed, has minimal debts, or does not know what to do with the money yet, then installment payments or an annuity could potentially make a bit more sense. Before making any decisions pertaining to your payout options, contact a financial advisor or professional that is able to provide insight on the best possible outcomes for you or your family.
How to File an Insurance Claim
When the insured person passes away, the insurance company will make sure that the death benefit is available to you as long as premium payments are made. Having said that, there are certain steps you have to take before you are able to receive life insurance proceeds.
The first step includes obtaining a copy of the insured person’s death certificate. In order to do this, you will need to contact your country or state vital records department and figure out what steps are needed. The funeral home you are working with will also be able to help you in receiving this document. Next, you will need to file an insurance claim with the insurance company and submit a copy of the death certificate. Life insurers will then review the circumstances of the policy owner and the details of the policy and then determine whether or not the claim will be approved or denied. The only way that the policy may be denied is if the death was the result of a suicide or a pre-existing condition that wasn’t covered through the policy.
The process for completing a life insurance claim can take time (around 30 to 60+ days). As a beneficiary, you are able to help things along through having multiple copies of the death certificates available in case they are needed and through also providing the insurance company with any other supporting documentation that is required when you decide to file the claim.
What You Are Able to Purchase with Life Insurance Proceeds
When you finally receive your life insurance proceeds, it is smart and important to take into account all factors and possibilities. A primary purpose of life insurance is to provide for living expenses when an income-earning person passes away. A surviving spouse or children may need the money to fund a life, maintain their lifestyle, or fund retirement. There are many ways that you can use the money though. These ways include aspects such as credit card balances, mortgages, college, or any other financial obligations. It is smart to handle higher-interest debts first before looking at less costly debts or future obligations. The only time that you would be limited in what you can purchase, is if someone has a lien or garnishment against you. Some examples of where this could happen is if you owe back child support, money on a lawsuit, or the IRS is looking for tax payments.
Common things that people use life insurance claim money for include:
- Paying for a mortgage or buying a home.
- Living expenses
- Purchasing a car
- Paying credit cards
- Paying student debt or tuition
- Savings and investing
- Starting a business
- Remodeling a home
- Vacationing and travel
No matter what you choose to use the money for, appreciate that you have the financial support that the claim money provides. Your life will be easier financially for it.