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Life insurance payouts explained

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’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 they’re worth. We’ll also explore what to do with life insurance payouts.

How do life insurance payouts work?

Life insurance payouts follow a three-step process:
  • First you notify the insurer;
  • Second, they assess the claim;
  • Third, the personal representative (the plan’s trustee, executor or next-of-kin) receives the payout.

In some cases, a beneficiary will receive the payout. A ‘beneficiary’ is the person who receives the payout from the personal representative.

Once the plan holder dies, the personal representative should contact the insurer. 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. In more complex cases, more information might be needed. The insurer will then assess the claim.

The life insurance payout is often a lump sum payment. But it can also be an annuity or monthly payment. This depends on what the policyholder decided when they took out the insurance.

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. There are many advantages to doing this, including a speedier claims process.

For many people who do not opt to write their plan in trust, the next-of-kin is usually their spouse or children. 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.

How much does life insurance pay out?

How much life insurance pays out for individuals can vary a lot. It depends on the amount of cover the plan holder asks for. It also depends on the type of cover they get.

The more the plan holder pays for their premium, the bigger the payout. The older you are, the higher your premium may be too. When you get a life insurance quote, you’ll be told exactly how much the payout will be.

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 you cannot claim on it.

Life insurance may also payout for ‘unnatural deaths’ too. 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 been diagnosed with a terminal illness.

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

Some life insurance policies let terminally ill people withdraw the money. This can help with medical expenses or lost income. 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. 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. Life insurance payouts can be used for:

Sometimes people take the life insurance as an annuity. This is a regular payment you’ll receive for the rest of your life.

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.

Relevant guides and articles

  • Life insurance for families

    Family life insurance can be used to pay off debts and contribute towards living expenses and other outgoings. Find out more about how it can help.

  • 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.

  • 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.