What is a life insurance payout?
A life insurance payout refers to the sum of money received by a policyholder’s beneficiaries upon their passing.
The payout is received following a successful claim on a valid life insurance policy.
Occasionally a payout can be made directly to the policyholder if the policy includes terminal illness cover and they’re diagnosed as having less than 12 months to live.
What percentage of life insurance policies are paid out?
4 out of 5 people believe that insurers payout less than 80% of insurance claims.
Despite this common misconception, 99.6% of all UK life insurance claims result in a successful payout.
Life insurance payout rates
Life insurance payout rates vary depending on the insurer, however, as discussed above, the reality far exceeds speculation with the average being 99.6%.
As illustrated, the majority of insurers Reassured arrange policies on behalf of, achieve a payout rate hovering around 99%.
Does life insurance payout the full amount?
Life insurance providers will never pay out a percentage of the value owed to your loved ones.
As a result, you can rest assured that if a successful claim is made, your beneficiaries will receive the full amount as stated in your policy.
The one exception to this is if the policyholder passes away during the waiting period of an over 50s plan.
This is a period of time at the start of the policy, usually 12 or 24 months, a policyholder must survive before a full payout is issued if death occurs as a result of natural causes.
If you were to pass away during the waiting period, instead of receiving a full payout your loved ones would receive either a refund of the premiums paid in or a percentage of the overall sum assured.
What is the average life insurance payout in the UK?
The average life insurance payout varies significantly depending on the type of cover in place.
For example, in 2017, the average value of a term-based life insurance payout was £78,323, whereas it was £4,511 for whole of life policies.
This is because whole of life policies are often taken out in later life when it can be costly to obtain a high sum assured. As a result, policyholders tend to opt for lower levels of protection.
Will the payout be a lump sum?
Generally speaking, life insurance payouts will be made in a one-off lump sum, either directly or via the deceased’s estate.
The one exception to this is family income benefit.
Whilst not strictly life insurance, this form of cover provides ongoing monthly, tax-free payments for a fixed term.
It’s ideal for replacing a lost salary as a result of your passing and helps reduce the need for complicated long-term budgeting.
When do life insurers payout?
Life insurance providers will make a payout upon receipt of a successful claim.
This is usually filed by the beneficiaries following the passing of the policyholder.
In order for the claim to be valid:
- Payments on the policy must be up to date
- The policy must not have expired
- All information provided at application must have been correct.
It’s also possible for an insurer to make a payout to the policyholder directly if they’re diagnosed with a serious condition and are given less than 12 months to live.
This requires the policy to have terminal illness cover included; something which is standard on all policies offered through Reassured.
Is a life insurance payout guaranteed?
Whilst a life insurance payout can never be 100% guaranteed, as long as all information has been fully disclosed, your loved ones will more than likely (approximately 99%) to receive a payout.
Term-based life insurance, however, doesn’t guarantee a payout as the term of the policy may expire before your passing.
These cost-effective policies are often used to cover a mortgage debt or protect a family until the children are financially independent.
If you’re looking for assurance that a payout will occur, it’s best to consider whole of life insurance or an over 50s plan.
Both of these forms of life cover provide protection for life, ensuring that it’ll always be possible to file a claim.
How long does it take to get a life insurance payout?
Once a claim has been filed, it takes on average a month for the beneficiaries to receive the payout, although there are instances where this could take longer.
When a policyholder passes away, a claim on their life insurance can be filed immediately.
However, you’ll require a death certificate before a payout can be issued.
On the other hand, there’s no time limit in which the claim must be filed.
What could cause a delayed insurance payout?
Whilst a payout can be made in as little as a month, there are some instances where this could be delayed.
Most life insurance policies include a contestability clause (usually 2 years) where the insurer can request further information regarding the death.
This may be through the form of post-mortem notes, medical records etc. and allows the insurer to determine whether any information was withheld during the application.
Life insurance policies also tend to have a suicide clause where a payout will be denied if the policyholder commits suicide within a certain time frame (usually 2 years).
Therefore, if the policyholder dies of suspected suicide during this period, a payout will be delayed until the cause of death is confirmed.
Finally, if the policyholder dies as a result of homicide a payout will usually be delayed until a verdict has been reached.
Each of these causes for delay can vary significantly and in all instances, a payout won’t be made until the insurer is certain the policy is valid and a claim should proceed.
When a life insurance payout will be refused
It has already been identified that life insurance payout rates are significantly higher than most believe, however, it’s inevitable that there’ll be times when a payout is declined.
17% of people believed this was due to insurance companies ‘avoiding paying out’.
In fact, the three main reasons life insurance payouts are refused include:
- Missed payments.
Who gets the payout?
Generally speaking, a life insurance payout is made to the following:
- Your spouse
- Your next of kin
- The person named in your will
- Named beneficiary in trust.
The best way to ensure your life insurance payout is received by who you desire is by writing the policy in trust.
This allows you to specify someone (a trustee) to carry out your wishes after you’re gone, ensuring your loved ones receive the payout. Much like an executor of a will.
If married, by default, the proceeds of your life insurance will automatically be paid to your spouse.
Do you have to pay taxes on life insurance payout in the UK
Upon your death, the value of your life insurance policy forms part of your estate.
Therefore, anything over the value of £325,000 is subject to 40% inheritance tax.
However, it’s possible to avoid/reduce the amount your loved ones pay in inheritance tax by writing your life insurance in trust.
This detaches the policy proceeds from your estate, ensuring your loved ones receive 100% of your life insurance payout.
It also reduces the overall value of your estate decreasing, if not eliminating altogether, the amount of inheritance tax paid.
Receiving an early life insurance payout
Whilst it’s most common for a payout to be made to your beneficiaries after you’ve passed away, it is possible to receive a payout before dying.
All life insurance policies provided through Reassured come with terminal illness cover as standard.
This means that if you’re diagnosed with a terminal illness and given less than 12 months to live, you can make an early claim on your policy.
These funds can then be used to put future arrangements in place for your family, such as:
- Making necessary adaptations to your home
- Paying for private medical treatment
- Settle any outstanding debts
- Enjoy your final days with those you love.
Does the payout stay the same no matter when you die?
When arranging life insurance cover, the sum assured is specified at application.
This is the amount your loved ones will receive upon your death and remains fixed throughout the policy.
However, the exception to this is decreasing term life insurance.
Designed to cover a repayment mortgage, the sum assured with decreasing term policies is set to decline in line with the remaining mortgage balance.
As a result, the further into the policy you pass away, the smaller the payout received.
How do life insurance payouts work? (The claims process)
To obtain a life insurance payout, a simple claims process must be followed.
This can vary between insurers, but as a general rule:
- Contact the insurer to make them aware you wish to make a claim
- Request a claims pack via email or post
- Fill in the forms and provide the required documentation, (death certificate, claim form, policy document)
- Receive payment either directly or as part of the deceased’s estate.
Don’t know the name of the insurer
It’s a common occurrence that upon the death of a loved one, the life insurance details are unknown.
In this instance, you should refer to the register of consolidations on the Association of British Insurers.
Here you’ll find the information required to identify whether your loved one had life cover in place, and if so, with whom the cover was held.
What can you do with a life insurance payout
The use of a life insurance payout is solely at the discretion of the beneficiaries.
Typically speaking a payout is used for:
- Mortgage repayment
- Funeral costs
- Outstanding debts and bills
- Ongoing family living costs.
But it’s possible to use the funds for whatever you desire.
Find the right life insurance payout for you
Ultimately, the likelihood and process of a life insurance payout vary between individual insurers, as does the cost of premiums.
To ensure you receive the right cover to meet your needs, at the best possible price, it’s essential to compare quotes from multiple insurers.
At Reassured, we can do all the hard work on your behalf.
We compare quotes from the top providers, offering 99% payout rates…and our award-winning broker service is completely free.
Simply get in touch to start your life insurance quote today.