How Life Insurance Claims are Distributed

Life insurance is one of those things we buy hoping never to use it. Eventually, however, those life insurance proceeds will be distributed, and it is important for policyholders and their families to understand this sometimes complicated process.

When the insured person dies it is up to his or her beneficiaries to claim the proceeds of the life insurance policy that was set up to protect their financial interests. Life insurance provides a valuable protection for those who are left behind, and it is important for all involved to understand the policy and how it works. Filing a life insurance claim is typically a straightforward process, but it is important to gather as much information as possible before calling to report the death. It is important to have all relevant information at your fingertips, including the person’s Social Security number, date of birth and so on. It is also a good idea to ask the funeral home for a certified copy of the birth certificate, since this document will no doubt be required to substantiate the claim.

After the claim has been filed and approved the proceeds of the life insurance policy will be distributed to the designated beneficiary or beneficiaries. In some cases there may be a contingent beneficiary who will receive the proceeds in the event the primary beneficiary is deceased. It is particularly important for couples to name contingent beneficiaries for one another to protect their survivors in the event both die at the same time.

Assuming that the primary beneficiary or beneficiaries are still alive, there will be some important decisions to make. Most life insurance companies provide the beneficiaries of the policy with a number of options, and it is important for the beneficiaries to consider those options very carefully. The choices they make will affect them not just today but perhaps decades down the road.

Life insurance companies typically provide the beneficiaries of a policy with four specific options – a lump sum distribution, a specific income provision, a life income option or an interest income option. It is important to understand the specific benefits and drawbacks of each option before making a final decision.

Lump Sum
The lump sum payment is one option to consider, and it can be a good choice for those who are adept at handling and investing their own money. With this option the entire death benefit is paid in one lump sum, and it is up to the beneficiaries to invest that money and make it last.

One of the advantages of this approach is that the money now belongs to the beneficiaries, and they are free to invest it as they see fit. For astute investors this can result in higher returns and more money for living expenses. In addition the money will become part of the beneficiary’s estate, meaning that it can be passed on to their own heirs.

The downside, of course, is that the money could be lost if the market takes a hit. Those who choose this option should be certain that they will be able to invest their money wisely and conservatively.

Specific Income Option
With this option the life insurance company promises to pay the beneficiaries a specific amount, representing both principal and interest, on a predetermined schedule. This option can be a good choice for those who would be uncomfortable handling and investing a lump sum payment. The payments are guaranteed, and there is no risk as there is with handling a lump sum distribution.

The downside of this approach is that once the money has been paid out it is gone. It does not become part of the beneficiary’s estate and it cannot be passed on to his or her heirs.

Life Income Option
This is one of the most popular options for life insurance settlements. With this option the beneficiary receives guaranteed income for the rest of his or her life. The amount of income will depend on a number of factors, including the size of the death benefit and the age and gender of the beneficiary.

This option also eliminates the risk of running out of money or losing money due to market conditions. The payments and income stream are guaranteed for life, making this an attractive option for many people.

The downside is that those payments stop when the original beneficiary dies. If a spouse or dependent children are left behind they will not receive the stream of income, and that could cause financial hardship unless other arrangements have been made.

Interest Income Option
The last option for the distribution of life insurance proceeds is known as the interest income option. With this option the life insurance company retains the proceeds of the policy and pays the interest earned to the beneficiary. The proceeds of the policy remain intact and are paid to a secondary beneficiary following the death of the primary beneficiary.

This can be a good way to provide protection to dependent children and other family members. The original beneficiary settles for a smaller payment in exchange for future payments that will go to other family members.