How Is a Life Insurance Death Benefit Paid Out?

Dealing with the loss of a loved one is never easy, and it can feel especially difficult to have to make legal and financial decisions during such an emotional time.   

If your loved one had life insurance, you may have questions about your options for settling the death claim — money that will be available to you quickly and generally tax free. We’ve outlined the most common options offered by insurance companies. 

TRANSFER THE MONEY TO AN INVESTMENT ACCOUNT 

Should you decide to invest, many financial companies — including Northwestern Mutual — can help you open an investment account and transfer the money directly to it. Investment accounts come in many shapes and sizes ranging from simple brokerage to having an advisor help you manage your portfolio. In many cases, life insurance proceeds are a significant amount of money, and if that money were invested it could produce significant returns over time. If you already have an advisor, he or she can help you with your investment considerations. If you don’t, the company can help connect you to someone who can help you make the right choices for your situation. 

TAKE THE LUMP SUM 

You can have the insurance company send you a check, wire the money or deposit it directly into your account, similar to how a paycheck direct deposit works. This allows you to do whatever you wish with the money once it’s in your account. That could include investing it on your own, using it to pay bills or settling the estate. 

CREATE AN INCOME PLAN 

Finally, it’s possible to have the money paid out to you over time in a variety of ways. 

Interest Income Plan. This option provides money to you without having to decide right away what you want to do with the full claim amount. Like a savings account, you receive interest on the full death claim. The interest can be paid to you or accumulate to grow the account. This allows you to make a claim without having to decide right away what you want to do with the larger death benefit. The interest is taxable, although your death benefit is not. In the future, you can take some or all of the original amount of the death benefit or switch to a different income plan. 

Period Certain Income Plan. This plan allows you to create income for a set amount of time, say 10 or 20 years. The amount of each payment will be based on how long you want the money to last and will include interest earned on the remaining principal. 

Specified Amount Income Plan. You can select a certain amount that you want monthly — say $5,000 each month — and based on that amount, the insurance company will tell you how long your payments will last. 

Lifetime Income Plan. You can select a plan that will pay out for the rest of your life or two people’s lives — in that case it will pay out until the second person dies. The amount you get will be based on your age (and the age of the second person if you select a joint income plan) at the time you begin taking payments, similar to how an income annuity works. You can also add “period certain” guarantees, which are options that ensure payments will last for you and a beneficiary for a certain amount of time, such as 10 or 20 years. 

USE A MIX OF THE THESE OPTIONS 

You could ultimately decide that you want to use a mix of these options. For instance, you could take a portion of your benefit as a lump sum and then transfer the rest to an investment account.  

While you should always file a claim in a timely manner, you shouldn’t rush into a decision. It may be beneficial to talk through your options with a financial advisor who can look at your bigger financial picture and recommend the best option for your needs and goals. 

A trusted financial professional can help you update your financial plan and figure out the best option for you based on your plan. If you don’t have an advisor, we would be happy to connect you with someone who can help you consider your choices. 

Lifetime income plans have no cash value. Once issued, a lifetime income plan cannot be terminated (surrendered), and the death benefit proceeds placed into the income plan are not refundable and will be subject to limited or no withdrawal rights. Portions of the payments from a lifetime income plan may be subject to ordinary income tax.