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Life insurance payouts explained

Wondering how life insurance payouts work and what to do if you get one? This guide answers all your questions.

Nothing can bring back a loved one who passed away too soon. But a life insurance payout can lessen the financial burden after their death. It helps contribute to everyday finances. You may already have or are considering taking out life insurance. It’s useful to know what your loved ones will have to do if they need to make a claim.

In this guide, you’ll learn how life insurance payouts work. We’ll look at who gets them, how to claim and how much payouts can be worth. We’ll also explore what to do when you cash out life insurance payouts.

What are life insurance payouts?

A life insurance payout happens if the policyholder passes away during their life insurance policy’s term. There are two types of life insurance:

Both of which have different cover periods of time or ‘terms’. We’ll talk more about this later.

How to make a payout claim?

Life insurance payouts follow a three-step process:

  • You'll need to notify the insurer.
  • They assess the claim – you may need to provide documents, like a death certificate, at this point.
  • The insurer issues the payout, if the claim is valid.

When the plan holder dies, the personal representative should contact the insurer. This is the plan’s trustee, executor or next-of-kin. It’s helpful to have the plan number. It’s also important to send contact details for the plan holder’s doctor. The insurer might also ask for a death certificate when assessing the claim. In more complex cases, they may need more information. The insurer will then assess the claim.

Who gets the life insurance payout?

In most cases, the person who gets the life insurance payout will be one of the following:

  • The trustee, if the plan is in trust;
  • The executor, if the plan was not in trust but the deceased had a Will; or
  • The deceased's next-of-kin.

When you take out a life insurance plan, you should consider writing this into a trust. This is an agreement where you ask another person to manage your assets after death. There are many advantages to doing this, including a speedier claims process. Learn more in this guide about trusts and trustees

For many people who do not opt to write their plan in trust, the next-of-kin is usually their spouse or children. They’ll become responsible for making the life insurance claim.

If the plan is not in trust, the payout will go into their estate. Your estate is the sum of all the things you own. It’s things like your home, car, money in the bank, jewellery and other assets. The payout gets added to this sum. It’s then distributed according to your will. If you didn’t leave a will, it’s given to your spouse, children or relatives in line with the rules of intestacy.

In some cases, a beneficiary will receive the payout. A beneficiary is:

  • someone who is not the personal representative, and 
  • the policyholder has named them to receive the payout.

How much does life insurance pay out?

The average life insurance payout can vary a lot. It depends on the amount of cover the plan holder asks for and the type of cover they get.

Usually, the more the plan holder pays for their premium, the bigger the life insurance payout. Older people, or people with pre-existing conditions often have higher premiums. But that can mean a bigger payout in the end. When you get a life insurance quote, you’ll be told exactly how much the payout will be.

How long does a life insurance pay out claim take?

Unfortunately, there’s no set timeframe for life insurance payouts. Providing you make your claim within the notification period set out in the policy, most insurers will aim to process your claim and make the payment as soon as they can. But, there are lots of factors that can cause a delay.

Sometimes, the approval process can take a while, with the insurer needing to reach out to third parties, such as doctors, before they approve the claim. If the plan wasn’t placed in trust, this can also delay the process as extra steps are needed to make sure the money goes to the right people. 

Does life insurance pay out for natural death?

Yes, life insurance usually pays out for deaths by natural causes. A ‘natural’ death means things like accidents, most illnesses or old age.

The death must occur during the cover period. If you have a term life insurance policy and die after it ends, your life insurance payout will not be made. You also need to keep paying your premiums or the cover will get cancelled and your loved ones cannot claim on it.

Life insurance may also payout for ‘unnatural deaths’ too – like accidents from a high-risk occupation or hobby. But you should always check your policy to know what is and isn’t covered.

Does life insurance pay out for terminal illness?

Yes, life insurance policies do usually pay out for terminal illnesses, but the diagnosis has to come after your plan begins. Insurers are unlikely to provide cover if you’ve already been diagnosed with a terminal illness.

If you get diagnosed with a terminal illness while covered, the insurer reserves the right to do extra checks. This is because they’ll want to verify if you, as the plan holder, already knew you were ill.

Some life insurance policies let terminally ill people withdraw the money after their diagnosis.. This can help with medical expenses or lost income caused by illness. If you think this could be helpful, ask the insurer when you’re getting a quote.

What to do with a life insurance payout

The grief of a loved one dying is often overwhelming. It can be hard to make major financial decisions after hearing the news. If you’ve received a payout, it’s a good idea to leave the money in your account to begin with. Take the time to think about the best way to use it.

Some things life insurance payouts can be used for include: 

To decide what to do with the money, you might want to speak to an independent financial advisor. They can help you work out the best way to use the money. If anyone contacts you offering to help you manage the money, don’t feel pressured to agree. Take some time to find out about them and make sure they’ve got your best interests at heart.

Can I cash in a life insurance policy

Life insurance is not a savings or investment plan for the policy holder. Typically speaking, life insurance companies only pay out upon the policyholder’s death to the beneficiaries. So, the policy has no cash value to the policy holder. However, in special cases, life insurers may pay out early in the event the policy holder has been diagnosed with a terminal illness. 

The terms and conditions relating to early life insurance payouts will always be dictated by your insurers. So, if you want to explore this option make sure you check the terms of your cover. 

Vitality life insurance 

Want to know more about life insurance or thinking about taking out a policy? Here are some of the benefits of taking out life insurance with Vitality:

  • In 2023, Vitality paid 99.7% of Life Cover claims, meaning you can be confident about your loved ones getting the payout (Vitality Claims and Benefits Report 2024).
  • Policyholders get access to Vitality partner discounts and rewards. Including rewards from big brands like Apple and Garmin.
  • You’ll also get free no-obligation advice. Our advisers offer expert advice to help you make the right decisions

Get your life insurance quote today.


Relevant guides and articles

  • Whole of life

    Whole of life insurance guarantees a payout to your loved ones when you die. Find out how this cover can protect your family's financial security.

  • Term life guide

    Term life insurance offers cover for a fixed period of time, guaranteeing a payout if you die during the policy term. Find out more about the benefits of fixed-term life insurance.

  • Life insurance for parents

    Life insurance for parents includes a variety of policies that mean your loved ones will be covered if you die. Read our guide for new parents.