About Life Insurance Payouts
Upon the death of a policyholder, a beneficiary is entitled to receive a payout from the life insurance policy. Such payouts can be made in a single lump sum or by one of several annuity options. These options can be complicated, and it's wise to consult with a financial advisor before making any decisions. The life circumstances of the beneficiary will greatly influence the option which is ultimately chosen.
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Filing a Claim
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In order to collect benefits, the beneficiary must file a claim with the life insurance company. The first step is to obtain a certified copy of the death certificate for the insurance company. It's wise to obtain several copies of the death certificate. The funeral director should be able to assist the beneficiary with this task.
The next step is to locate the policy and contact the agent who sold the policy. The agent can assist the beneficiary in negotiating the claim process and understanding the payout options. The contact information for the insurance company and the agent should be included with the insurance policy. If it's not possible to locate the agent, the beneficiary can contact the insurance company directly.
Locating Missing Policies
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If the policy is missing, it may be possible to locate the relevant information by a number of means.Check the deceased's address books for the names of insurance agents. Check bank books and canceled checks to find any payments for life insurance premiums. Check the deceased's tax returns for the past two years for interest income and expenses for life insurance.
Contact every insurance company the person ever had a policy with as well as former employers to determine if there is a policy still in force. Check the mail for a full year after the policy holder has died. Premium notices are usually sent annually. For paid- up policies, a company may send an annual status notice or a dividend notices. It's also a good idea to check with the state's unclaimed policy office. After a number of years, insurance companies turn over unclaimed money to the state.
For very old policies, it is possible that the original company might have changed its name or merged with another company. Every state insurance department maintains listings of life insurance companies licensed to do business in the state. Or consult the Best's Insurance Reports, which is updated annually and available as a reference resource in many libraries. This publication lists insurance company's current names and contact information, along with tracking name changes, mergers and other changes for insurers.
If this effort fails, the insurance trade association MIB Solutions offers a policy locator service for a fee. -
Selecting a Payout Option
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Once the claim has been filed and approved, the beneficiary will be asked to select from a number of payout options. The basic choices are a lump sum payment or one of several annuity, or annual payment options. Each option has its pros and cons, and the final decision will depend on the preferences and life circumstances of the beneficiary. Except for the lump sum option, all payout options include the actual death benefit, which is tax-free, and interest, which is considered taxable income.
Consulting with a financial advisor is often wise. A tax advisor can provide more detailed information on the taxes associated with annuity payments. A life insurance agent, financial planner, financial counselor, or tax advisor may be able to help the beneficiary understand the dollar amounts associated with each option of life insurance payouts. More information about benefit options is also available from the Life and Health Insurance Foundation for Education, the American Council of Life Insurers, and the Insurance Information Institute.
Annuity Options
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If the beneficiary does not elect to receive a lump sum payment, a number of annuity options are available. The list below is a summary of several annuity options. However, beneficiaries should consult with a financial advisor for a complete explanation of the options available for his or her specific situation.
1. Life Income. The beneficiary receives guaranteed payments for life. Payments are determined by the age and gender of the beneficiary. Any remaining benefit is retained by the insurance company.
2. Life Income with a Period Certain. The beneficiary receives income for life or a specified period of years, whichever is longer. The longer the period, the smaller the amount of each payment. If the beneficiary dies before the guarantee period is complete, a second beneficiary receives any remaining payments.
3. Joint and Last Survivor Life Income. The beneficiary chooses a life income benefit for multiple persons, such as a spouse and children. This option guarantees payments until the last named beneficiary dies.
4. Specific Income.The beneficiary sets up a schedule for payments of the death benefit until the principle is exhausted. If the beneficiary dies before the benefit period ends, a second beneficiary receives the remainder.
5. Interest Income. The beneficiary receives payments only on the interest paid on the death benefit. The original benefit can be paid to a second beneficiary or to the original beneficiary once he reaches a certain age.
Considerations
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Life insurance policies are usually designed to cover the policy holder's final expenses, with the remainder to be distributed as a death benefit. Funeral expenses, consumer debts and other outstanding obligations should be taken care of first. However, student loans are nearly always canceled upon the death of the loan holder, and need not be paid out of a life insurance policy benefit. If the beneficiary elects to receive a lump sum, that will be the only payment ever made. Therefore, especially if the amount is large, it is strongly encouraged to consult with a financial advisor to determine the best use for the money. In the case of annuity payments, it is almost always preferable to make arrangements for a second beneficiary to receive any uncollected funds.
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