Life insurance policies are taken out to ensure your loved ones or business partners are not burdened with financial worries in the event of your death.
The cash payout is often invaluable at an emotional, difficult time, but how do life insurance payouts work? In this guide, we’ve put together the answers to the most common life insurance payout questions, and explained how to claim.
What is a life insurance payout?
When a life insurance policy holder passes away, the beneficiary named in the policy will receive a payout. This is usually one lump sum payment, however, it can also be a monthly payout or an annuity. This depends on the type of policy and the terms taken out.
When does life insurance not pay out?
There are a few main reasons why a life insurance company may not pay out for a claim:
- The cover has lapsed because the policy holder did not keep up with the premiums.
- Non-disclosure reasons. The policy holder did not answer the underwriting questions on the application form honestly and accurately. For example, they may have not revealed that they had specific illnesses, or they are a smoker but didn’t disclose it.
- If the policy holder takes their own life within the first couple of years of taking out the life insurance policy. The main reason for this is to stop someone from buying life insurance, and then taking their own life to pay off debts for their family.
- If the policy holder travels or lives abroad for more than a year.
- Insufficient documents to claim. If the beneficiary doesn’t have the correct documents needed, such as the policy holder’s death certificate.
- Outliving the policy. If the policy holder doesn’t die within the time specified in the term, the insurer doesn’t pay out.
Do life insurance companies always pay out?
UK insurance companies have an excellent claim payment rate. The most recent figures, from 2019, show that insurers paid 98.3% of all claims - more than £3 billion was paid in life insurance claims.
In 2019, the life insurance claims payment figures were:
Term life insurance – 97.4% of claims were paid with an average value of £77,535
Whole of life insurance – 99.99% of claims were paid with an average value of £3,465
Critical Illness cover – 91.6% of claims were paid with an average value of 67,573.
However, there are some fundamental reasons why life insurance companies don’t pay out such as:
- Lying or presenting inaccurate information on the application form
- Lapsed premiums
- Suicide early in the policy
- Outliving the policy term
- Insufficient documents when claiming
- Moving abroad
What happens to your life insurance if you don't die during the policy term?
If you don’t die during the policy term, there will be no pay out. At the end of your life insurance policy term, if you haven’t passed away, you simply stop paying your premiums and the cover ends.
Can an insurance company refuse to pay a claim for life insurance?
Yes, a life insurance company can refuse to pay a claim for life insurance for a number of reasons. If the policy holder doesn’t present accurate information on the life insurance application form, they can refuse to pay out for the beneficiaries. For example, if a policy holder lies about medical illnesses, job, lifestyle, travel plans, family health history or smoking status.
There are a few other reasons they can refuse to pay out such as when the beneficiary doesn’t have the right documentation (death certificate, certificate of insurance policy), or the policy holder takes their own life within the first couple of years of the policy.
Do life insurance payouts stay the same no matter when you die?
Life insurance payouts don’t necessarily stay the same no matter when you die, because it depends on the type of policy that is taken out.
Level term life insurance covers a specific amount of money, and this will be the same whenever you pass away, whether that’s after 5 years or 20 years.
However, with a decreasing term life insurance policy, the payout amount gradually reduces over the years. This type of policy is often taken out to cover mortgage repayments, as the amount owed also decreases as the years go on.
A family income benefit policy is a different type of term life insurance, and rather than receiving one lump sum, the payout provides regular financial support (similar to a monthly salary) for the beneficiary of the policy.
How long does a life insurance payout take?
Life insurance doesn’t pay out automatically, this must be claimed by the beneficiaries and they must present the required documentation. On average, a life insurance claim is usually paid within a month, but this could be sooner.
How to claim on a life insurance policy
Claiming on life insurance is often a difficult emotional time for loved ones, so typically life insurance companies are sensitive and attempt to make the claiming process as painless as possible.
There is no time limit for claiming on life insurance, so you can wait until whenever you feel ready following your bereavement.
1. Get in touch with the life insurance company
You should be able to find contact details on the life insurance policy paperwork or their website. Contact them to let them know that you intend to make a claim.
Initially, you’ll need to provide identification, the name of the policy holder, their cause of death, the policy number and your relationship to the deceased.
2. Collate and provide the paperwork you need to make a claim
You’ll need the following documentation to make a life insurance claim:
- Death certificate
- Completed claim form
- The life insurance policy document - a certificate of insurance would have been issued with the policy when it was originally purchased. If you have any issues locating this, the ABI (Association of British Insurers) should be able to assist you.
3. Receive your pay out
Once the life insurance provider has all of your paperwork, they’ll begin processing your claim. This will often take less than a month, if there are no disputes or missing documents.
Once all approved, and depending on the terms in the policy, you’ll either receive a lump sum payout or a monthly payment.
We’re here to help
If you are unsure about what policy to choose and would like advice, you can enlist help from insurance brokers. Here at I’m Insured, we strive to find the most suitable policy for you and your family - you can call to speak to one of our experts on 0800 334 5980.