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Understanding how life insurance payouts work is essential when incorporating a policy into your financial planning. You will need to determine which payout option to designate and understand how quickly benefits are paid.

How Soon are Benefits Paid?

When the policyholder dies, the designated beneficiaries must submit a certified copy of the death certificate and a death claim with the insurance company. The insurance company has 30 days to review the submitted death claim and decide to deny it, pay it, contest it, or request additional information needed to arrive at a decision. Although many states give the insurance company 30 days to pay out the policy, some insurance companies may take as much as 60 days. Insurance companies try to pay as soon as possible because delaying payouts incurs costly interest charges.

What Will Delay a Payout?

If the insured dies within one to two years after the policy is issued, the payout will be delayed as much as 12 months. This delay may be due to the contestability clause. This allows the insurance time to investigate and determine if the application for insurance contained fraudulent information.

The contestability clause can delay payouts. The life insurance company has a period of time, usually, one to two years (depending on the state that the insured resides) that they can review, investigate, and deny a claim. The period starts as soon as the insurer obtains the life insurance policy.

Payouts will likely be denied if the policyholder commits suicide within two years of obtaining the policy.

Insurance companies may delay or even deny a claim if the insured’s death certificate states that the cause of death is a homicide. Payout will be postponed until the beneficiary is cleared of any murder charges about the insurer’s death.

How is the Payout Distributed?

For the last 200 years, the beneficiary has received a lump-sum payout. The lump-sum payment is the most common form of payout distribution.

Some life insurance companies may offer an annuity option or an installment payout option. These options distribute the payout regularly for a determined number of years ranging from 5 to 40 years.

Can a Policy Holder Receive a Payout?

Policyholders can receive a payout against the dollar value of the policy if the insured suffers from a chronic or terminal illness. In this case, the policyholder is also the beneficiary. It is called an accelerated death benefit.