Life insurance payout rates

Life insurance payout rates vary depending on the insurer, however, the reality far exceeds speculation with the average being 98.3%.

As illustrated below, the majority of insurers Reassured arrange policies on behalf of, achieve a payout rate of around 99%.

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 50 life insurance plan.

This is a period of time at the start of the policy, (12 or 24 months), a policyholder must survive before a full payout is issued if death occurs 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 or a percentage of the sum assured.

The average life insurance payout varies significantly depending on the type of cover in place.

For example, in 2019, the average value of a term-based life insurance payout was £77,535, whereas it was £3,465 for whole of life policies^[2].

This is because whole of life policies are often taken out in later life when it can be costly to secure a high sum assured.

As a result, policyholders tend to opt for lower levels of protection.

Whilst a payout can never be 100% guaranteed, as long as all information has been fully disclosed, your loved ones will more than likely (approximately 99%) 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 a guaranteed payout, depending on your age, it's best to consider whole of life 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.

Whilst a payout can be made in as little as a month, there are some instances where this could be delayed.

Most 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 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.

The best way to ensure all of your life insurance payout is received by those you desire is by writing your life insurance 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.

Upon your passing, 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 selfless investment.

It also reduces the overall value of your estate decreasing, if not eliminating altogether, the amount of inheritance tax paid.

When arranging life insurance cover, the sum assured is specified at application.

This is the amount your loved ones will receive upon your passing 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.

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 (ABI).

Here you'll find the information required to identify whether your loved one had life insurance, and if so, with whom the cover was held.

For more information read our article on how to find out if someone has life insurance »