Affordable Life Insurance Protection for Your Family

How Life Insurance Works After Death

How Life Insurance Works After Death

If you own a life insurance policy or are considering the purchase of a plan, you may be wondering, "How does life insurance work after I’m dead?"

It’s a very important question to consider, and you should think ahead and plan for that time so your loved ones know what to do. 

The insurance company doesn’t just send off a check to your family when you die.

It’s now that simple. There are steps that must be taken in order for the proceeds from your life insurance policy to be transferred to your beneficiary.

Steps to Take for Proceeds of Life Insurance to Be Paid Out


First, make sure you let your beneficiaries know that you do own life insurance. If you don’t. they won’t know and will likely never get the payout from your plan.

Next, tell them where the policy is located and what to do when you die.

The beneficiaries need to contact the insurance company and make a claim on your policy. That means, they request a payment of the death benefits be made because you (the insured person) has died.


Here are the Steps to Take after Death of the Insured:

  • Locate Life Insurance Policy
  • Contact Life Insurance Company
  • Make a Claim on Your Life Insurance
  • Payment of Death Benefit Made to Your Beneficiary
  • Use Proceeds for Any Purpose
  • No Federal Taxes


Options to Receive Proceeds


Your beneficiary may have several options available to receive the payment of your death benefits. Some common payment options on life insurance proceeds include:

  • Lump Sum Payment
  • Monthly Installments
  • Checkbook


The reason most people buy life insurance is to provide financial security for the future of the loved ones they leave behind.

The payout of death benefits from your life insurance policy can be used by your beneficiaries for any purpose they deem fit.


For example, many beneficiaries use life insurance proceeds for the following purposes:

  • To pay off debt
  • To pay for final expenses of the insured person
  • To maintain lifestyle
  • To pay for monthly living expenses
  • To pay for child’s college education
  • To pay off home mortgage loan
  • To pay for healthcare costs


In addition, many people Invest the proceeds and receive income from the investments to help replace the lost income of the person who has died.


How Long Before Life Insurance Pays Out After Death of Insured?


Usually, death claims are paid by the insurance carrier in a timely matter, usually within 30 days. This is after the life insurance company has received all the necessary forms, including a completed claim form, and certified death certificate.

Typically, a life insurance company will pay a death benefit to a beneficiary within a few days of receiving proof that the insured has died. Most commonly, the beneficiary or policy owner goes to the office of the county or state coroner and obtains a death certificate for the insured person who has passed away.


Is Life Insurance Considered Part of an Estate After Death?


Usually life insurance will not be considered part of your estate, and is safe from creditors. Since the insurance company pays the benefits directly to the survivor (beneficiary), the money is never placed in the deceased’s name, and is therefore not in the estate.


Is a Life Insurance Payout Before Death Taxable?

Yes, some types of life insurance can easily be cashed in before death for the accrued cash value in the policy.  

If you need money and you have a life insurance policy with some cash value, there are ways to get the cash from your insurance policy without the insured person passing away. You may be required to pay taxes on this amount.

Check with your professional tax person regarding any tax implications in this situation.


How to Cash In a Life Insurance Policy After Death of Insured?


To cash in a life insurance policy after the insured person dies, you start by contacting your life insurance agent or the insurance company through which the policy was issued.

The policy should have a phone number listed on it. Use this number to contact the insurer and make a claim on the policy.


Are There Taxes on Life Insurance?


In most all cases the life insurance payout tax is zero. 

Usually there is no tax consequence on life insurance proceeds paid out upon death of the insured person. 


How Do You Get Paid on a Life Insurance Policy?


Life insurance benefits can only be paid out once the designated beneficiary files a claim with the insurance carrier. 

But if the beneficiary is not aware of his or her designation as a beneficiary of the policy, he or she may not be alerted by the insurance company for a long time.

If you suspect that the deceased had a life insurance policy, you may need to find it on your own.

Go through the deceased’s belongings, review the checkbook for payments made to an insurance company, and look for the name and phone number of an insurance agent for the deceased person. Also, there may be insurance policies located in the safety deposit box, safe, or papers of the deceased.


Can an Executor Get the Amount of the Life Insurance Policy?


Life insurance policies and annuities typically bypass probate because they pass to named beneficiaries directly, by contract.  

Only the beneficiaries would receive payment of any proceeds from a life insurance policy death benefit.


Does Life Insurance Really Pay Out?


Life insurance "pays out" at the time of a certified death certificate is received by the carrier. There are very few exceptions to this, which may include fraud or misrepresentation at the time of application for coverage, or suicide occurring within two years of buying the policy (one year in some states).


What Happens to Life Insurance When the Insured Dies?


How to Collect a Life Insurance Inheritance 

You can collect policy death benefits on life insurance by sending the original death certificate and the original life insurance policy to the insurer if you are named as a beneficiary in the policy.

The company will send the death benefits directly to you. It doesn't go to or become part of the policy holder's probate estate, although it can contribute to the decedent's overall estate for estate tax purposes. 

You may have no idea that you are entitled to death benefits from a life insurance policy after the death of a person you know. 


When There's More Than One Beneficiary


Some life insurance policies name more than one individual to receive a portion of the death benefit proceeds when the insured person dies. The money is normally divided equally among them when this is the case. However, the insured may have stated a certain percentage of the overall proceeds that each beneficiary is to receive upon death of the insured.

Should one beneficiary die before the insured, that individual's share would normally pass to any other named beneficiaries to be shared equally among them. The deceased's estate would take the proceeds only if none of the policy's beneficiaries are alive.

Why a Life Insurer Might Not Pay Out Death Benefits 

It's possible for a life insurer to refuse to pay out benefits under some circumstances, but generally only if the policy provides for it. 

By law, insurance companies can take up to 1-2 years in most states to investigate and potentially deny death claims for violations of the insurance policy's terms, conditions and exclusions.

Insurance companies will generally not pay out a claim for death benefits when the deceased has committed suicide, if it occurs within two years of the start of the policy (one year in some states). 

They might also decline to pay death benefits if the insured regularly engaged in and died engaging in dangerous activities such as drag racing, or died during the commission of a crime.

All these terms (exclusions) are typically spelled out in the insurance policy.

The same can apply to any un-divulged health issues, such as high blood pressure, or cancer, but the insurance company would probably have to prove that the insured was aware of the condition at the time the life insurance policy was taken out. It wasn't diagnosed for the first-time years later.

Income Tax Consequences 

You don't have to pay income tax on the initial policy death benefit proceeds when you're the beneficiary of a life insurance policy. The Internal Revenue Service doesn't consider death benefits from life insurance plans to be income.

Any interest earned by the proceeds would be taxable, however, if the policy earns income after the date of the insured’s death. This might happen if you don't take the proceeds in one lump sum but rather stretched them out in installments over several years. The balance retained by the life insurer would keep growing and generating interest.

NOTE: The same would happen if you took all the proceeds from the death benefit at once and placed that money into a savings or investment account. Any interest or dividends earned would be taxable income.

You would need to include this income on your tax return just as you would report any other interest or unearned income you received during the tax year.

Inheritance Tax Consequences 

There's no inheritance tax at the federal level, but six states do impose this tax as of 2019: Iowa, Kentucky, Nebraska, New Jersey, Maryland and Pennsylvania.

This isn't an income tax, but rather a percentage of the value of the assets you inherit.

NOTE: Some states that do have inheritance taxes, such as New Jersey, specifically exempt life insurance proceeds from any taxation.

Estate Tax Issues 

Life insurance proceeds contribute to the value of a decedent's taxable estate if the decedent was the owner of the insurance policy, or if the decedent transferred ownership within three years of death; such as, into an irrevocable living trust.

A decedent's estate is liable for federal estate taxes if it's valued at more than $11.4 million as of 2019. 

Any balance of value over this limit is taxable. Twelve states and the District of Columbia also impose estate taxes as of 2019, some with much lower tax exemption limits.

Those states and their tax exemptions are listed below:

  • Connecticut: $3,600,000
  • District of Columbia: $11,400,000
  • Hawaii: $11,400,000
  • Maine: $11,400,000
  • Maryland: $11,400,000
  • Massachusetts: $1,000,000
  • Minnesota: $2,700,000
  • New York: $11,400,000
  • Illinois: $4,000,000
  • Oregon: $1,000,000
  • Rhode Island: $1,561,719
  • Vermont: $2,750,000
  • Washington: $2,193,000

There's a huge difference between the $11.4 million federal exemption in New York, Hawaii, Maine, Maryland, and D.C., and the $1 million exemption that's available in the states of Massachusetts and Oregon.

Beneficiaries of life insurance proceeds are not usually responsible for paying the estate tax, however, unless the decedent's last will and testament contains specific provisions asking them to contribute some of the death benefit proceeds to satisfy the tax burden of the estate.

The Insured's Final Expenses 

The named beneficiary of a life insurance policy usually is not responsible to pay off the decedent's debts or final expenses. The probate process typically pays the deceased's creditors and final bills from estate funds and, if necessary, by liquidating remaining assets of the estate.

Life insurance proceeds that go directly to a named beneficiary never become part of the decedent's probate estate, so the death benefits are not available to creditors. Beneficiaries have no legal obligation to use the money to satisfy the decedent's debts unless they also happen to be cosigners on loans of the deceased person.

How a Life Insurance Policy Works


Life insurance is a contract between an insurance policy owner and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person. 

Depending on the insurance contract wording, other events such as terminal illness or critical illness can also trigger payment of benefits while the insured person is living. The policy owner typically pays a premium to the insurance carrier, either regularly (monthly or annually) or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.


How Living Benefits of Life Insurance Work?


How It Works: If you become terminally ill (life expectancy of 6 months or less based on a medical diagnosis), you can take out a portion of the death benefits from your life insurance policy as cash, which can then be used to cover the costs of medical expenses, treatments, or long-term care. 

You’re borrowing against your insurance policy, and any cash that’s taken out of the policy, is subtracted from the amount of death benefit proceeds your beneficiaries get when you die.

Make sure you let your beneficiaries know you have life insurance coverage, where to find your life insurance policy, and how to make a claim on your policy, upon your death.


NOTE: Make sure you have your premium payments set up for direct deposit from your checking or savings account, so your life insurance coverage never lapses, and you don’t lose your insurance due to non-payment of premiums due.


IMPORTANT: Keep your life insurance policies in a fire-proof metal container, personal safe, or safety deposit box. Also, keep your insurance agent’s phone number and address, as well as, the phone number and address of your life insurance company, handy for your beneficiary.

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Additional Resources:


How Life Insurance Works After Death

Life Insurance for Seniors Age 50-85

Disclosure: Compensated Affiliate