Grieving the death of a loved one might just be the hardest time you’ll go through. The last thing you want to do in the middle of it is stress over money—and that’s why your loved one had life insurance.

But trying to collect on their policy can be confusing. If you’re like most people, you’ve got questions like: How do I claim the life insurance payout? When will the money get here? How will the money get here?

If you’ve experienced a loss—or you’re helping a loved one through their loss—we are so sorry. This situation is devastating. But when you understand how life insurance payouts work, you can get the money you need to take care of yourself and your family during this difficult time. So, let’s get started.

How Long Does It Take for a Life Insurance Payout to Be Distributed?

The big question on everyone’s mind is When will I see the money? After all, there are funeral expenses and bills to pay. The short answer is, it depends. Before they’ll distribute any money, the life insurance company has to review the claim and confirm that the policyholder really died.

States know families are counting on these payouts, so they set legal limits on how long the reviews can take. Most states allow up to 30 days—but of course, each state is different, so be sure to check the laws in your area. (Keep in mind, it’s a 30-day limit for review, but it can take up to 60 days to receive the payout.)

While life insurance companies have limited time to approve a claim, you have no limit on how long you can wait before making a claim. You can make it the day of, or you can wait years.

Once the life insurance company has reviewed the claim, they can deny, delay or approve it.

Denials

Life insurance doesn’t cover all situations—like if the policyholder quit paying, lied on their application, or let the policy expire. In that case, you’ll get a letter stating that the claim was denied and why. Most companies will also refund the premiums your loved one paid up to that point.

If your claim is denied and you think it was a mistake, you may be able to contest it using the insurance company’s appeals process or—if they don’t have an appeals process—by hiring a lawyer. Fortunately, denials are really rare, so it’s pretty unlikely that you’ll have to deal with this. 

Delays

Claims can get delayed for several reasons. Usually, it’s because the paperwork is incorrect or incomplete. In that case, the reviewer will ask you for more info. Once you send it to them, the claim will either get approved or denied from there.

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Another reason claims get delayed is if the policyholder died within the two-year contestability period—which is the two years directly after they purchased the policy.

Insurance companies created the two-year contestability period because people planning to commit fraud or suicide are most likely to do so during those first two years. If your loved one passed away in either of those circumstances, the life insurance company will most likely deny your claim.

Unfortunately, the two-year window can slow things down even if your loved one passed away of natural causes and told the total truth on their application. It can take up to a year for the insurance company to investigate and approve your claim. We know—it’s complicated, and it sucks. If you have questions or concerns about a delay, contact your insurance agent.

Finally, claims can get delayed if there are extenuating circumstances, such as homicide, or if the deceased was killed while committing a crime or tried to commit fraud (by something like lying on the application). Then you may not get the payout until any criminal investigations clear the name of the deceased.

Approvals

The good news is that most life insurance claims get approved. You’ll typically get the payout within 60 days of the approval. And if your claim was straightforward and easy to review, the life insurance payout could be distributed in as little as 10 days.

Who Gets the Life Insurance Payout?

The life insurance payout will be sent to the beneficiary listed on the policy. If there’s more than one, each beneficiary will need to submit their own claim. Then, the insurance company will pay to each person or organization the amount the policyholder left them.

There are some guidelines for beneficiaries, so here goes:

First, we recommend that people tell their loved ones who the beneficiaries are and how much each person is getting ahead of time—that way there are no unpleasant surprises! But if your loved one didn’t do this, be aware that you are not legally entitled to know who the other beneficiaries are. The insurance company can’t tell you who else is getting money—or how much.

Even if you know who the other beneficiaries are, you can’t file a claim for them. The only exception is if you’re a financial power of attorney for someone who is a beneficiary. Then you’ll need to talk to your insurance agent about how to access that money on behalf of the person you’re caring for.

And finally, if you’re a power of attorney or trustee, you can’t keep any of the payout for yourself—unless the policyholder left you an amount as payment for helping oversee their affairs. If they didn’t, then your sole responsibility is to manage that money for others. 

What Are the Payout Options?

Before you receive the life insurance payout, you’ll have to choose how you want to be paid. Some insurers let you decide on that when the policy is purchased. In those cases the insured or policyholder decides how the beneficiary receives the payout. But usually, you’ll decide how you want to be paid when it’s time to receive the payout.

These are some of the most common options.

Lump Sum

Lump-sum payments are what they sound like: You get the entire payout all at once. We recommend this option because it’s the simplest. Plus you can put the money to good use the minute you get it because a lump sum puts you in charge—not the insurance company.

If you invest it wisely, there will be plenty for you to live on and leave your loved ones a large, lasting legacy. When you think about the long term, lump-sum payouts beat installments hands down!

Installments

With an installment plan, the life insurance company pays you a certain amount of money on a regular schedule (usually monthly, quarterly or yearly). And that money gets paid out over a certain period of time.

For example, let’s say Paul had a $750,000 life insurance policy. His wife Jody could ask the insurance company to pay her $75,000 a year for 10 years.

Unfortunately, there’s no more money after the 10 years end. That’s why some insurance companies offer installments that last “for the rest of your life.” But there are some huge flaws with lifetime installment plans.

For starters, the life insurance company is just guessing how much money to give you based on how long they think you’ll live. So, if your loved one passes away when you’re 25, you might get a couple hundred dollars a month. That isn’t even enough to cover rent.

And regardless of your age, the reality is that life is just too short. If you pass away before you get the entire payout, then poof! It disappears. The insurance company will keep the leftover money, so you can’t even leave it to anyone else.

Some people try to get around this by choosing a period certain installment, which means the insurance company will keep distributing the payout for a set amount of time—say, 20 years. If you pass away in that time, the balance of the payout will go to the secondary beneficiary listed on the original policy. If they’re still alive, that is. If not, then you guessed it—the insurance company keeps the money.

Whatever you do, don’t take the payout in installments!

Interest

You can actually let the life insurance company keep the money and invest it for you. Then they’ll pay you the interest the payout is earning—but not the payout itself. No, we’re not making this up and, yes, it’s crazy!

With this option, you have no control over your own money. That’s nuts! The insurance company chooses how to invest it—and because they’re not you, they’re not motivated to make sure you come out ahead. Which means you can’t make the right investments to get maximum returns. Instead, you’re stuck with whatever crummy investments they make for you, while they keep the giant payout your loved one intended for you to use.

It’s way smarter to get a lump sum payout and invest it with the help of a financial advisor. They can teach you about investing and what your options are so you can live the life your loved one wanted you to have.

How the Money Arrives

Insurance companies usually pay with a check or direct deposit into your bank account. If you choose to let the insurer keep the money and invest it for you, you won’t see the payout at all—just the interest. Please don’t choose this option.

How Much Do You Get?

If the life insurance policy you’re getting a payout from was a term life policy, you’ll get the exact amount the policyholder purchased (For example, if it was a $1 million policy, you’ll get $1 million.)

If the insured had a permanent life insurance policy (like whole life or IUL), your payout could be smaller than the policy value purchased. Yikes! That would happen if the policyholder took out a loan against their policy or withdrew some of the cash value and died before paying it back.

And with permanent policies, you should also know you probably won’t get any cash value unless your loved one took extra measures to make sure it goes to you. Normally, it goes to the insurance company.

Do You Have to Pay Taxes on Life Insurance Payouts?

Life insurance payouts are totally income tax-free—so in most cases, you’ll get the full amount of the payout. But you might have to pay other types of taxes.

Estate Taxes

Estate taxes are pretty ridiculous: They’re basically the government’s way of swooping in and taking your money once your loved one isn’t around to protect it—or you. They were invented to keep generations from building too much wealth. You’ll have to pay estate taxes if the life insurance payout plus the rest of your loved one’s estate exceeds a certain amount. In 2024, that amount is $13.6 million, so the good news is that the average person won’t have to pay these taxes.¹

Income Taxes on Interest

If you take an interest-based payout, you’ll have to pay income taxes on that interest. And it’s similar if you’re on an installment plan. With installments, the money that you haven’t received yet is earning interest—so you’ll be taxed on that interest.

If you take the lump-sum payout (recommend) and invest it (recommend!), you’ll have to pay taxes on the growth. As always, there are two things you can count on: death and taxes.

What Do You Do With a Life Insurance Payout?

There are a ton of things life insurance covers. The important thing is that you have a plan. This is a lot of money—you have to tell it where to go, or else you’ll be wondering where it went!

First, take care of the Four Walls: food, transportation, shelter and utilities. You can use the life insurance payout to cover these basic needs and focus on your family, instead of rushing back to work to pay the bills.

When the Four Walls are taken care of, put the remaining money toward the Baby Step you’re working on. Depending on the amount of the payout, you’ll be able to get out of debt, save and invest, and give good gifts to the people and causes you care most about. Just make sure that you take care of yourself and your family first. That’s what this money is for.

And if there’s one thing getting a life insurance payout points out, it’s how important life insurance is. Your loved one left you money because they wanted you to live your dreams and have a beautiful life. If you have people who depend on you, you can do that for them too by making sure you have a term life policy in place. While we aren’t promised tomorrow, we can make sure today that our loved ones will be okay without us.

Get your free quote from our RamseyTrusted^® partner Zander Insurance. They’ll help you find the right policy so you can have peace of mind knowing your loved ones’ futures are set.