Life Insurance Payouts: How They Work, Types of Life Insurance Payouts, and More

A woman searches on her computer to know how her life insurance policy will payout the benefit amount to her beneficiary

When you purchase a life insurance policy, you hope you never have to use it, but it’s comforting to know it’s there. However, understanding the payout process for your life insurance policy is almost as important as purchasing the policy in the first place. Whether you are a policyholder or a beneficiary, here’s what to know about life insurance payouts and life insurance settlement options. 

How Does Life Insurance Work?

After purchasing a life insurance policy, the policyholder will make recurring premium payments to the life insurance company to maintain coverage. If the policyholder dies while the life insurance policy is still active, the insurance company will pay a sum of money—known as the death benefit—to the policy beneficiaries. 
The policyholder designates the beneficiaries when they purchase the policy and these can be adjusted while the coverage is in effect. There are a variety of ways the death benefit can be used, which is why it’s important for the policyholder and beneficiaries to understand the life insurance payout process.

Types of Life Insurance Payouts

  • Lump-sum Payments: The default payout option for most policies, which includes one payment of the entire benefit.
  • Installments and Annuities: Installments and annuities means the death benefit is divided into payments spanning a certain number of years.
  • Retained Asset Account: A retained asset account sets the life insurance payout up like a checking account.

Who gets the life insurance payout?

The beneficiaries of the policy will receive the life insurance payout. The policyholder has the option to choose a single beneficiary, a primary beneficiary or multiple beneficiaries. A contingent beneficiary would receive the payout if the primary beneficiary passes away or for another reason is unable to receive the payout. 

Do life insurance companies contact the life insurance beneficiary?

No. When the policyholder passes away, it is up to the beneficiary to contact the life insurance company to begin the claims process. You may be able to start the process online or initiate the claim over the phone. Each company’s process is different, but most will require paperwork and supporting documentation to process the claim and payout. 

How long does it take to get life insurance money?

The speed in which your life insurance claim is processed can range anywhere from a week to a few months. This can depend on factors such as how the policyholder passed away and the life insurance company’s procedures. As long as the life insurance company can confirm the policyholder did not lie on the policy application, the payout process should go smoothly.

Is the life insurance payout taxable?

Generally, the money beneficiaries receive from a life insurance payout is not considered taxable income. 

SelectQuote Can Answer Your Questions About Life Insurance Payouts

From understanding the different types of life insurance to choosing a life insurance company, we’re here to make buying life insurance simple. We’ll help you understand the payout process and answer any questions you may have. We work with some of the nation’s most trusted life insurance companies and can provide cost comparisons in just minutes to help you find the right coverage with the right carrier at the right price for you.

We do the shopping. You do the saving.