Life insurance offers important financial protection, but many people wonder how much their loved ones will actually receive. The average life insurance payout in the United States in 2023 was about $206,000, according to Aflac. However the final amount your loved ones receive can vary based on several key factors.
A life insurance payout is the amount of money paid by the insurance company to a policy’s beneficiaries after the insured person passes away. Also referred to as the death benefit, this payout generally equals the face value of the policy, though the actual amount can differ depending on the type of policy, the inclusion of any riders, or any loans or withdrawals against the policy’s cash value.
In this guide, we will explain what impacts a life insurance payout, how the payout process works, and when it might make sense to explore alternatives like a life settlement.
How Much Is the Average Life Insurance Payout?
While the majority of policies never pay a benefit (primarily due to lapses or being surrendered before the insured passes), the average life insurance payout in the United States in 2023 was about $206,000, according to Aflac. In 2023, the Insurance Information Institute reported that life insurance benefits and claims totaled $831.9 billion, covering death benefits, annuity benefits, disability benefits, and other payouts. To estimate the payout for the current year, it’s important to account for annual inflation in the United States.
However, payout amounts can range widely depending on the type of policy and the coverage selected. While policies generally pay out a lump equal to the face value of the plan, not every payout is guaranteed to match the full coverage amount. Factors like missed premium payments, outstanding loans against the policy, or beneficiary disputes can impact the final payout.
How Do Life Insurance Payouts Work?
The life insurance payout process involves three key steps:
- File a Claim
Beneficiaries must file a claim with the insurance company, typically submitting a death certificate and required paperwork. There’s no strict deadline, but it’s recommended to file soon after the policyholder’s death for quicker assistance with funeral and living expenses. The insurer typically reviews the claim within 30-60 days. - Claim Review
The insurer reviews the claim, death certificate, and policy details to check for potential issues such as fraudulent information or policy exclusions that could delay or deny the payout. - Payout
If the claim is approved, the payout is typically issued within 14-16 days. Beneficiaries can choose from different payout methods, such as a lump sum or installment payments, which can affect how quickly they receive the funds.
What Factors Impact a Life Insurance Policy Payout?
Several factors influence the final payout amount and how quickly beneficiaries receive it. The most common factors include:
Factors Affecting Payout Amount
- Policy Type: Term life, whole life, and group life insurance policies often have different payout structures and benefits.
- Cause of Death: Some policies exclude certain causes of death, such as suicide, within the contestability period, which can affect eligibility for a payout.
- Contestability Period: Most life insurance policies have a two-year contestability period. If the insured passes away during this time and there is evidence of misrepresentation on the application, the insurer may delay or deny the payout.
- Beneficiary Information: If the primary beneficiary is deceased or if no beneficiary was named, the payout process can become more complicated and time-consuming.
- Outstanding Loans: If the policyholder took out a loan against a permanent life insurance policy and did not repay it, the loan balance could be deducted from the payout amount.
Factors Affecting Payout Timeline:
In addition to the factors listed above, certain issues can specifically delay the payout:
- Missing or Incomplete Information
If required documents, such as the death certificate or claim forms, are missing or incomplete, the payout will be delayed until all necessary paperwork is submitted. - Incorrect Information
Any incorrect information submitted during the claim process can lead to delays, as the insurer must verify all details. Misrepresentation on the original application can also delay or even void the claim. - Payout Method
Some payout methods, like lump sums, are quicker to process than others, such as annuities or retained asset accounts, which require additional setup and paperwork. - Number of Beneficiaries
If there are multiple beneficiaries, the process may take longer to ensure that each one receives their share of the payout. Multiple claims or disputes among beneficiaries can further extend the timeline. - State Laws
Life insurance is regulated at the state level, and each state may have different rules regarding contestability periods, payout timelines, and claims processes. State-specific policies can impact how quickly the insurer processes the claim. - Illegal Activity
If the policyholder’s death occurred while engaging in illegal activities, the insurer may contest the claim, which could delay or prevent the payout.
Understanding the factors that affect both the payout amount and the timeline can help beneficiaries navigate the life insurance process more effectively. Being aware of what could impact the payout amount or cause delays will set realistic expectations, allowing for smoother preparation and planning during this important time.
How Are Life Insurance Payouts Paid Out?
Beneficiaries can typically choose from a few different payout options:
Lump Sum
The most common option, a lump sum payout, provides the entire death benefit at once, giving beneficiaries immediate access to funds.
Installment Payments
Some policies allow for structured payouts over a set number of years, providing a steady stream of income rather than one large payment.
Annuities
An annuity option spreads the payout over the beneficiary’s lifetime, offering regular payments based on factors like age and life expectancy.
Retained Asset Account
The retained asset account operates like a bank account for the death benefit and can earn interest over time.
Each payout option comes with its own advantages, and beneficiaries should consider their financial needs and goals when making a decision. If you have questions about your own financial planning decisions, be sure to speak with a financial advisor.
How Long Does It Take to Receive a Life Insurance Payout?
Most life insurance payouts are processed within two weeks to two months after the insurer receives the necessary paperwork, such as the death certificate and claim forms. However, several factors can cause delays, including:
- Incomplete documentation.
- Death occurring during the contestability period.
- Disputes among beneficiaries.
- Investigations related to the cause of death.
Having multiple beneficiaries can affect the payout process.
Filing a complete and accurate claim as quickly as possible can help minimize potential delays.
Can a Life Insurance Payout Be Denied or Taxed?
While life insurance provides important financial protection, there are situations where a payout could be denied or impacted by taxes.
When Can a Life Insurance Claim Be Denied?
Although most claims are paid without issue, insurance companies can deny a claim under specific circumstances, including:
- Misrepresentation on the application
- Policy exclusions for specific causes of death.
- Lapsed policies due to non-payment
- Fraud or suspicious circumstances surrounding the death.
Carefully maintaining the policy and providing accurate information is crucial to protecting the intended benefit.
Are Life Insurance Payouts Taxable?
In most cases, life insurance death benefits are not taxed when they are paid out as a lump sum to beneficiaries. However, taxes may apply if:
- The payout earns interest while being held or paid in installments.
- The policy is included in an estate that exceeds federal estate tax thresholds.
- Group life insurance benefits exceed a certain limit under employer-provided policies.
Beneficiaries should consult a financial advisor or tax professional to understand any potential tax obligations based on their individual circumstances, but for additional information, you can read our article regarding whether the cash value of a life insurance is taxable.
Selling Your Life Insurance Policy Instead of Waiting for a Payout
In some cases, policyholders may find that they no longer need their life insurance coverage or that the premiums have become unaffordable. Rather than letting a policy lapse or waiting for a future payout, it is possible to sell a life insurance policy through a process known as a life settlement.
A life settlement allows a policyholder to sell their life insurance policy to a third party for a lump sum that is greater than the surrender value but less than the full death benefit. This option can provide immediate financial flexibility for those facing medical expenses, retirement needs, or other financial goals.
Learn more about the life settlement process and find out how Harbor Life can help you access the value of your policy today.
Get a Free Estimate for Your Life Settlement
If you no longer need your life insurance policy or are considering new financial options, a life settlement could provide a smart alternative. Harbor Life Settlements offers a free, no-obligation estimate to help you understand how much your policy could be worth.
Get your free estimate today using our calculator and take the first step toward unlocking your policy’s full potential or call us at 1-866-775-3493.
