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Life Insurance Payouts and You: The Facts You Need to Know

hands with red hear - life insurance payout

A life insurance benefit may not take effect until after the policyholder has died, but before the designated beneficiary can receive any life insurance payout, he or she must make a few decisions.

Although this immediate grief-stricken time is certainly less than ideal for the beneficiary to make such important moves, the actions just after a life insurance claim often decide how and when the payout is received.

Here’s what to expect from the life insurance payout process.

Claiming Your Insurance Payout

“Once a policy is issued to a policyholder, the policy will indicate everything that is needed should a death claim occur,” says Brenda Silva, life insurance specialist for AAA Northeast. “In most cases the beneficiary will have access to the policy of their loved one and that individual will contact the company directly, or in some cases contact the agent to assist.”

As beneficiary, you should receive any necessary forms and documents in the mail and will work with a representative from the insurance company to process your claim. Depending on the policy and the provider itself, the requirements involved may vary. Be ready with some key bits of information, such as the policyholder’s death certificate, Social Security number, correct date of birth and confirmation of their address. “This information is imperative to processing a claim,” Silva said.

If you are not a close relative or don’t have this information, it may involve some legwork to track down. Policies with more than one beneficiary will need to have separate forms for each individual that submits a claim.

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When You’re Expecting an Insurance Payout

When it comes time for you to receive your life insurance payout, you might have several options at your disposal. Naturally, each one brings its own set of benefits, and you’ll want to carefully consider your own long-term financial situation before you commit to one.

Common examples of payout options include a fixed period and a fixed amount. While the former offers a steady stream of payments (comprised of both principal and interest) doled out in regular installments over a period of years or decades, the latter focuses instead on a set amount delivered to suit your specific needs. You can also opt for an interest-only payout or to have the sum directed toward a particular investment account – more on that in a moment.

Which payout option you select will have a great deal to do with your own finances. So evaluate your current income as well as both your short- and long-term expenses to determine how your insurance payout will fit in. Of course, if you have any questions about your options or how to identify the best choice for you, don’t hesitate to reach out to a professional for advice. Remember that your payout is intended first and foremost as a supplementary source of income before you decide to explore other payment and investment options.

insurance payout

How to Spend It

As discussed above, what you do with your life insurance payout is entirely up to you. However, we would be remiss if we didn’t at least point out some of the more popular choices.

  • Address any claim-related expenses: Since the payout is intended primarily for financial relief, the first and most obvious destination for the money is toward any lingering bills and debt tied to the claim itself. Likely, the policyholder accounted for this in designing his or her plan upfront.
  • Pay off any necessary taxes: Everyone’s least favorite expense is – no surprise there – a common selection for individuals looking to clear the financial slate. Eliminating any taxes, both tied to the claim and otherwise, is always a good idea to consider.
  • Make an investment: For added security in your own financial future, investing at least some of your payout is a smart way to go. You may wish to put more money into a retirement account, invest in real estate or even start a life insurance policy of your own. Just be sure to reach out for professional advice before leaping headfirst into anything.

Do you still have any questions about life insurance payouts? Let us know in the comments section below so that we can help you address them.

Learn more about your life insurance options and get a quote today at


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11 Thoughts on “Life Insurance Payouts and You: The Facts You Need to Know

    1. Hi Alan, I’ve forwarded your question to one of our life insurance agents and you should be hearing back soon. Thanks!

    2. In General Life Insurance Death Benefits are not taxed as income by the IRS. However there are some exceptions to this rule. A beneficiary should consult a tax professional.

  1. Thanks for the info. We have a few old policies that are whole life, so 52 years later ww are still paying a ridiculous amount of money for them. We would like to sell them. The agents stated that much of the cash value is dividends and therefore the amounts of payouts will taxed heavily. How do we figure out what the taxable amount will be, and what % is taxed. Thanks for your assistance. Appreciate any info you can provide.

    1. Hi Sharon, thanks for your comment. I’ve forwarded your question to one of our life insurance agents and you should be hearing back soon. -Marisa

  2. Having sold life insurance for over 46 years I found your explanation on the types of
    Insurance, the need, and the payout very easy to understand.I feel you must get good
    Response and I hope your staff responds quickly.Needless to say I miss the challenge
    Of meeting the life insurance needs of clients.

  3. What is the “mandatory paperwork” that is going to require some “legwork” and “digging” while applying for life insurance proceeds as a beneficiary. I’d like to leave all necessary information available for my beneficiary when I die.

    1. Hi Wesley – I reached out to life insurance specialist Brenda Silva to answer your question and have updated the article with her response. She says the key bits of information a beneficiary should be prepared with include the policyholder’s death certificate, Social Security number, correct date of birth and confirmation of their address. Thanks for reading! -MP

  4. Can a policyholder request payment in full? I will be using the full amount to pay off the mortgage and burial expenses. If I don’t go first.

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