What Happens With Life Insurance When Someone Dies?

Life insurance is a financial contract providing monetary support to designated individuals or entities upon the policyholder’s death. Beneficiaries receive a death benefit to replace lost income, cover expenses, or address outstanding debts.

Initial Steps After a Death

After a policyholder’s death, beneficiaries must gather essential documents and information to initiate the life insurance claim process. Locating the life insurance policy is a primary step, as it contains details such as the policy number and the name of the insurance company.

Obtaining certified copies of the death certificate is important. Insurers require official proof of death; photocopies are not accepted. Secure multiple copies, perhaps 5 to 10, as various institutions like banks and government agencies may also require them.

Confirming the named beneficiaries on the policy is also a necessary step. This ensures the correct individuals are identified as eligible to receive the death benefit. Once confirmed, contact the life insurance company to notify them of the policyholder’s passing and inquire about their specific claim procedures and required forms.

Filing a Life Insurance Claim

After gathering the necessary documents and identifying the insurer, the next stage involves formally submitting the life insurance claim.

Beneficiaries typically obtain the official claim form directly from the insurance company, available through an online portal, by mail, or by request. Completing this form accurately is important, ensuring all informational fields are filled and required signatures are provided.

The completed claim form, along with a certified copy of the death certificate, must be submitted to the insurer. While some companies accept submissions online or via email, mailing documents is also common. Providing the policy number helps streamline verification.

Upon submission, beneficiaries typically receive a confirmation of receipt. Processing timelines vary, but many claims are processed within 14 to 60 days. Insurers may occasionally request additional information to verify the claim or policy details, which can extend the processing period.

Understanding Payout Options

Life insurance benefits offer various disbursement methods to beneficiaries, allowing flexibility based on financial needs.

The most common option is a lump-sum payment, where the entire death benefit is paid as a single amount. This provides immediate access to funds for covering expenses or debts.

Beneficiaries can also choose installment payments, distributing the death benefit over a fixed period or in fixed amounts. This provides a steady income stream for long-term financial planning. Any interest accrued on the unpaid balance may be subject to taxation.

Another option is an interest-only payout, where the beneficiary receives only the interest earned on the death benefit, with the principal remaining intact for secondary beneficiaries. Some insurers offer retained asset accounts, interest-bearing accounts allowing beneficiaries to access funds as needed via a checkbook or debit card. Interest earned on these funds is typically taxable.

Tax Implications of Life Insurance Benefits

Life insurance proceeds paid to a beneficiary are generally not taxable income for federal purposes. The death benefit is usually received tax-free, whether as a lump sum or in installments, though exceptions exist.

One exception is interest accrued on the death benefit before payout, which is typically subject to income tax. If a policy was transferred for value, proceeds exceeding the amount paid for the policy and premiums may be taxable.

Life insurance proceeds can also be subject to estate taxes if included in the deceased’s taxable estate and the total estate value exceeds federal or state exemption thresholds. For example, the federal estate tax exemption for 2024 is $13.61 million per individual. If the policy names the estate as the beneficiary or the deceased retained ownership, proceeds may be included in the estate’s value.

Situations Without a Named Beneficiary

If a life insurance policy lacks a named beneficiary or all named beneficiaries are deceased, the death benefit typically goes to the policyholder’s estate. The proceeds become an estate asset, subject to probate, which determines asset distribution when there is no will or living beneficiary.

When proceeds enter probate, they may pay outstanding estate debts or expenses before distribution to heirs, potentially reducing the amount received. Probate can be time-consuming, delaying payout for months or longer, depending on estate complexity and state laws.

Probate can also lead to additional legal fees and administrative costs, diminishing the death benefit. To avoid these issues, policyholders should name primary and contingent beneficiaries and review designations periodically.