Life insurance payouts are not immediate. Beneficiaries should not expect a check to arrive shortly after a loved one’s passing. Instead, they must first file a claim. This typically involves submitting documents that provide details of the death. It may also include sending in a copy of the policy. Once all of the necessary paperwork is received, the insurance company will then review the claim. (It’s common for states to grant firms up to 30 days to assess everything.) Most companies remit payment within 60 days, although there’s no official time frame.¹

There are instances where payment may be delayed or denied. While these scenarios are rare, it’s important to be aware of them. A delay can occur if an individual passes away within the first two years of the policy. This is often due to a contestability clause, which allows the carrier to investigate whether or not any fraud has been committed. Payment can be fully denied if it is determined that the policy holder lied on their application about income, known ailments or pre-existing medical conditions, smoking, immigration status or weight. And of course, the company will not be financially liable if the deceased let their plan lapse.²

Beneficiaries can receive their life insurance payout in one of two ways. The most common option is to have the money sent as a one-time, tax-free lump sum. Alternatively, it is also possible to receive the payments in installments as an annuity.³ Some people see this as advantageous since the steady checks can double as a regular source of income, which can make it easier for them to manage their money. An annuity may also ultimately be worth more than the lump sum, provided the beneficiary lives a long time.⁴

There can be potential drawbacks to the annuity option. Depending on the size of the payment received, it can take a long time to earn the same amount as the lump sum. There’s also the chance that the beneficiary will pass away before collecting everything that’s owed. If at any point the beneficiary wishes to withdraw a sum larger than the regular payments, they are likely to face a fee for the early withdrawal.⁵

There are no stipulations on how a life insurance payout may be used. The money is simply meant to provide support for the beneficiaries. They can apply the funds however they see fit. This could be for anything from covering the cost of the funeral and remaining medical bills to paying college tuition, a home mortgage or covering any other expenses.⁶