 Personal Finance PowerPoint Presentation. Life Insurance Payouts. Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, look in something like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia. How does life insurance work? Which you can find online, take a look at the references, resources, continue your research from there. This buy, the Investopedia team updated May 23, 2022. In prior presentations, we've been taking a look at insurance in general, moving on to life insurance and noting the two major categories of life insurance, that being term or peer life insurance, the one that we always want to be comparing and contrasting to using as our baseline, our ruler. And then we've got the permanent life insurance. Keeping that in mind, we're now looking at filing a claim. We're imagining a situation then that life insurance has been set up. The person that was covered by the life insurance has died within the term of the policy. Therefore, we're looking to get the death benefits to be paid out. And this is the process for paying out the death benefits, which of course is going to be important given the fact that the person that set up the life insurance policy may likely be dead at that point in time. So you've got to make sure that the finances and so on can be taken care of, including claiming the death benefits from it. So death benefits are not paid out automatically from a life insurance company. So obviously the life insurance company can't say, ah, his heart stopped beating. We've got the heart beating monitor in their chest as part of the life insurance policy payment, automatically given out no, there's going to be some paperwork bureaucratic process that we've got to go through. The beneficiary must file, must first file a claim with the life insurance company. So we've got to have the claim depending on the insurance company's policies. This may be done online or it may require a paper claims filing. So you might be able to do it online, which could be more convenient oftentimes these days or the good old paperwork. No matter how you end up filing, the company normally requires paperwork and supporting evidence to process the claim and pay out. So obviously it's a contract. They've got to make sure that the conditions of the contract are met in order for the death benefit to be paid out, including you would think verification of the death of the person covered. So your beneficiaries may be required to provide a copy of the policy. So you've got to say, here's the policy that we had, along with the claims form, here's the claim for the benefits. They must also submit a certified copy of the death certificate, which is a common piece of paperwork you might have. Anytime someone passes away to help deal with the financial items that that individual might have been dealing with themselves that are basically in their name. So you've got to be dealing with the death certificates, either through the county or municipality or through the hospital or nursing home in which the insured died. Policies owned by recoverable or irrevocable trusts must ensure that the insurance company has a copy of the trust document identifying the owner and the beneficiary added Bernstein. When benefits are paid, life insurance companies are typically paid. Life insurance benefits are typically paid when the insured party dies. Beneficiaries file a death claim with the insurance company by submitting a certified copy of the death certificate. So evidence of the death. Many states allow insurers 30 days to review the claim. So obviously they're going to have some paperwork that needs to be done after which they can pay it out, deny it, or ask for additional information. So hopefully everything goes smoothly and they can pay it out at that point in time, but they might argue against it saying that certain conditions haven't been met, for example, and then you've got to go from there. If a company denies your claim, it generally provides a reason why. So if they don't go through with the claim, they've got to tell you why they denied the claim and then you're going to have to say, is that fit or not? Do I have any recourse from that point in time? Most insurance companies pay within 30 to 60 days of the date of the claim according to Chris Huntley, founder of Huntley Wealth and Insurance Services. Quote, there is no set frame. He said, quote, but insurance companies are motivated to pay as soon as possible after receiving bona fide proof of death to avoid steep interest in charges for delaying payments of claims. Payout delays. There are several possible situations that may result in a delay in payment. So then if you if they're going to, can I get my payment basically right away? You got that 30 days. The insurance company has some pressure to kind of pay off the claims as soon as it's relevant to do so. But there could be reasons for the delays. So beneficiaries may face delays of six to 12 months if the insurer dies within the first two years of the insurance of the issuance of the policy. So you can think from an insurance company perspective that could look kind of suspect if they die right after they get the life insurance. The reason, the one to two year contestability clause, quote, most policies contain this clause, which allows the carrier to investigate the original application to ensure fraud was not committed. Because again, it looks a little suspect if you buy life insurance and die right after you purchased it. As long as the insurance company cannot prove the insured lied on the application, the benefit will normally be paid, end quote, said Huntley. So in other words, they might look into it and say, Hey, did you tell us that you were not on your deathbed when you were on your deathbed and then you died right after you got the insurance company? Well, then, you know, you weren't honest in the insurance application. You might be able to purchase certain types of insurance, even if you have severe medical conditions, but you have to make sure that you're purchasing the right type of insurance and not basically lying to the insurance company. So most policies also contain a suicide clause that allows the company to deny benefits if the insured dies by suicide during the first two years of the policy. Payments may also be delayed when homicide is listed on the insured's death certificate. In this case, a claims representative may communicate with the detective assigned to the case to rule out the beneficiary as a suspect. The payout is held until any suspicion about the beneficiary's involvement in the insured's death is clear. If there are charges, the insurance company can withdraw the payout until charges are dropped or the beneficiary is acquitted of the crime. So obviously, if we have an insurance company, insurance claim out, the beneficiary then has a motive to off and that has insurance company, which is a sad but true situation from time to time. And so that could delay things. So delays to payouts may also arise if the insured party died during the course of illegal activities such as driving under the influence, the insured party lied on the policy application, the insured omitted health issues or risky hobbies or activities like skydiving. So if you're like, you know, you got to ask the questionnaires and whatnot. If you're not honest about your health or your hobbies like to skydive without a parachute and stuff like that, then that could impact because you were not honest on the application. So payout options, you can also help decide how your death benefit will be paid out after you die. Here are a few of the payout choices available to you and your beneficiaries. We got the lump sum payment. Since the inception of the industry, more than 200 years ago, beneficiaries have traditionally received lump sum payments of the proceeds, meaning when you die, they're not going to give you like an annuity over time, a monthly payment, but usually it comes in the form of a lump sum amount. The default payment option of most policies remains a lump sum, said Richard Rich, president of Intramark Insurance Services, who has incorporated installments and annuities. So you might say, hey, maybe I would like to have an annuity kind of thing set up, might have some benefits to that type of payout structure. Modern life insurance policies have seen a monumental improvement in how payouts can be delivered to the policies beneficiaries said Bernstein. So these include an installment payout option or an annuity option in which the proceeds and accumulated interest are particularly over the life of the beneficiary. These choices give the policy owner the opportunity to select a predetermined guaranteed income stream out between five and 40 years. Quote, for income protection, life insurance, most life insurance buyers prefer the installment option to guarantee the proceeds will last for the necessary number of years, in quote, added Bernstein. Beneficiary should remember that any interest income they receive is subject to taxation. So it's usually when you get the life insurance proceeds, the life insurance portion of it might not be taxable, but if you're going to be paid basically in an annuity kind of format, then the interest that you're getting that's accruing, especially after the point of death, might have a taxable component to it. So you may end up better off with the lump sum rather than the installment, end up paying more in taxes on the interest if the death benefits is fairly high. Reigned asset account, retained asset account, some insurers offer beneficiaries of significant policies, a checkbook instead of a lump sum or regular installment. So the insurance company acting as a bank or financial institution keeps the payout in an account, allowing you to write checks against the balance. Such an account would not allow deposits, but pay interest to the beneficiaries. So then the company can kind of hold on to the money longer and kind of like a bank in that situation. They'd still have the money and be able to possibly use that to invest elsewhere and whatnot. And so that could be beneficial for the insurance company too. So the term for this is accelerated death benefit for related insight. Take a closer look at accelerated benefit writer. Traditionally, life insurance policies will only pay out at the policy holder's death. Talk with your insurance agent about whether this option makes sense for you. How does term life insurance work? Term life insurance is often the most accessible type of insurance to purchase depending on the type of policy. You may or may not need a medical exam, and the policy will last for and agreed upon a number of years as the pure life insurance often 20 to 30 year terms. You pay monthly premiums on your death benefit and if you died before the term is up, the insurance company pays your beneficiaries. If you reach your term limit, your policy ends and then you outlived your term and the policy served its purpose, you didn't die and that's still good. How does whole life insurance work? Unlike term, whole life insurance is a permanent form of insurance allowing fixed death benefits coverage over the policy holder's life. The life insurance premiums for whole life insurance are higher than what you pay for a term life policy which is why we always compare to the pure term policy whenever we have more complex strategies which may include whole life. Whole life contains a cash value account which can accumulate as interest accrues on a fixed rate and a tax deferred basis. So you can borrow against your whole life policy but the benefit acts as the collateral so your benefit shrinks if you don't pay it back. If you don't pay the premiums or the loan back your policy will be canceled, any money you borrow may be considered income and subject to taxation given the circumstances. So it could be a little bit more complex in that case. We've talked about that in prior presentations. How does universal life insurance work? Universal life insurance like whole life is another form of permanent life insurance. These policies offer a death benefit and a cash value account. Universal life insurance stays with you until the end if you pay your monthly premiums until you die. There are three kinds of universal life insurance variable, guaranteed, and indexed but with all three you have the flexibility unlike with other policies to change your death benefit or lower your premiums your cash value accounts earnings can help pay the premiums on your account. Can you get life insurance with a pre-existing condition? If you have pre-existing conditions you may find it difficult but not impossible to purchase life insurance. Coverage will depend on various factors primarily your individual health situation depending on the life insurance company some pre-existing conditions like diabetes high blood pressure and anxiety may be covered but with higher premiums. How long do you have to pay into life insurance policy before it pays out? Life insurance will pay out upon the death of the insured as soon as it is enforced so that's the point you buy the life insurance policy to insure against the premature death. This usually counts as the first premium payment so that usually for most life insurance like a standard term would be when you first purchase it when you make your premium payment however some life applications however come with the option of binding a certain amount of coverage while the underwriting process takes place in case the applicant dies before the policy is issued known as a binder the binder usually requires payment up front when the application is taken and will either be returned or credited toward the first premium once approved. What's the bottom line then? Life insurance policies provide both policy holders and their loved ones peace of mind that financial difficulties may be avoided in the event of a person's death. Understanding how the process works from buying life insurance to filing a claim to receiving a payment can help you proceed with your plans to purchase coverage confidently.