It is a given fact of life that we cannot control what is around the bend. The best things in life are often those we could never have foreseen, and sadly so are some of the worst things. Life throws curveballs and we have to roll with the punches, that's just how it is. However, that doesn't stop us from preparing ourselves and our loved ones as best we can to deal with the challenges they might face.
If you have already taken out a life insurance policy, then you are ahead of the game - you have put in place a financial safety net to protect your family. When you pass away, even if life deals you a rotten hand and that is sadly sooner than expected, your family will receive a lump sum of money and be financially secure in your absence.
But you may be wondering how your family would actually get the payout if they ever needed to file a claim? You want to understand how it all works, so you can ensure that your loved ones are as prepared as possible to cope during a difficult time.
This guide will walk you through what happens when you pass away and provide some helpful tips to make things easier for your family to access a payout when they need it most.
Do life insurance policies actually payout?
Before we get stuck into the ‘how’, let’s address the elephant in the room. How can you be sure that your life insurance policy will actually pay out for your loved ones?
Sadly, this is an all too common concern, but the fact is that, when you look at the two main types of life insurance, 99.9% of whole of life insurance claims and 97% of term life claims were paid in 2020[1]… so in short, yes, you can be almost 100% confident that your family will receive the payout they need.
In most cases, a claim can be made when the policyholder passes away. As long as the policy is valid, the premiums have been paid up to date, and there are no discrepancies in the information provided at the time of taking out the policy.
However, a claim could be denied if it is found that the policyholder provided false information or failed to disclose important details during the application process. Or if you fail to pay your premiums on time, the policy could lapse and your family may not receive the payout.
Another reason is if the cause of death is not covered under the policy. For example, if you have a pre-medical condition, your policy may not cover death as a result of the condition.
Now, let’s talk about how that happens...
Who will get my life insurance payout?
When you take out life insurance cover, you may be asked to name the beneficiary of your plan. This is the individual or group (usually a family member) who will receive a payout from your life insurance policy when you pass away. You can name more than one beneficiary if you wish and it can be someone from outside the family, for instance, a charity - basically, you have the freedom to select whoever you want!
It is a good idea to name a beneficiary, because in the event that one hasn’t been named, things can get a little more complicated. Typically, the payout would instead pass to your estate (meaning it becomes part of the total value of all your possessions at the time of death), which can be subject to further fees and taxes that may reduce the value of the amount.
It can then make it more difficult for your loved ones to actually access the funds, adding stress at a time when that is the last thing they need. That is unless you set up your life insurance policy in trust - more on this later!
Alternatively, if you have a joint life insurance policy, meaning that both you and your partner have one insurance plan covering the pair of you, then the payout is quite simple. When one of you passes away, the surviving partner will receive the insurance payout by default. In the tragic circumstance that both partners pass away at the same time, then the money would go to any beneficiaries named on the plan application or, if there are none, to the estate.
It is quite common for parents, in particular single parents, to name their child as the beneficiary of their life insurance payout. If the beneficiary named on the insurance plan is a minor, they won’t be able to access the payout until they turn 18 and will require an adult to manage the funds until that point.
Many life insurance products will allow you to name this adult - called a custodian - when you apply for your policy, so you know it is in safe hands until your child is old enough to inherit it. Otherwise, the court will assign a legal guardian to look after the funds - but this can cost some money and take some time, so if you know who you would want as the custodian, it's better to name them up front.
Though the beneficiary of your insurance cover is the only one who will actually receive the payout, it’s worth bearing in mind that they don’t have to specifically make the claim themselves - they can get, for example, a close friend to do so on their behalf.
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What information will my family need to give?
The process of making a claim is pretty straightforward. Once your beneficiary, or family member, is ready to begin the claims process, the first thing they must do is get in touch with your insurer. The insurer will usually issue a claims form for them to complete online. There are a number of details that may be required to make the claim:
Name of the policyholder (your name!)
Policy number
Sometimes a policy document (certificate of insurance that should have been issued when the policy was purchased)
Cause of death (this will be explained on your death certificate, which can be supplied by a funeral director or the General Register Office)
Their identity and relationship with the policyholder
The good news is that most of this information may already be available in the policyholder’s ie. Your paperwork, which can make the process all the more clear cut.
Clearly, making things as easy as possible for your loved ones in terms of accessing the information they need after you pass can make the world of difference. Do your family members know which company you are insured by and where your policy details are? While they may be able to figure it out by looking at your direct debit history or trawling through old email threads, you don’t want your family to have any unnecessary hurdles to clear.
It’s not an easy conversation to have, but one of the best things you can do is let your beneficiary, or the person likely to make the claim, know what they’ll need to do and where they can find all of the information they will need, so that there is one less thing for them to have to figure out during an already challenging time.
Learn more about how to make a claim.
How long does it take to get a life insurance payout?
If your beneficiary is clearly named on your policy, then payouts can be processed in anything from a few days to a month. Sometimes a claim may be delayed if the cause of death is unclear and needs to be looked at in more detail, but this is unusual.
The best thing your family can do to speed up the process is to get all the documentation in as quickly as possible. Yet another argument for the importance of making sure well in advance that they know where to find everything!
It is also worth checking whether your life insurance policy is written in trust. This can sometimes speed up the process, because it means that a trustee (someone who is highly trusted, like a solicitor) is responsible for ensuring that the payout goes to the person chosen. As well as cutting down the wait time, it can alleviate stress from your family, as the thinking and admin is done for them!
The great news is that, regardless of how you have your life insurance plan set up, a payout is likely to happen relatively quickly. That said, it may be reassuring to know that there is no time limit for the individual, or group, to make a claim. In other words, there’s no need to rush - the policy will still be waiting for them whenever they are ready to claim on it.
Can I cash in my policy?
Typically, the purpose of a life insurance policy is to provide financial protection for your loved ones in the event of your death. This means that in most cases, the policy will only pay out upon the death of the insured individual to their beneficiaries, and there is no cash value available for the policyholder themselves.
However, there are some exceptions where life insurers may offer early payouts in certain situations, such as if the policyholder has been diagnosed with a terminal illness. In these cases, the terms and conditions for early payouts will vary depending on your specific policy and insurer.
Even if you can cash in your policy, there may be a surrender fee or penalties associated with doing so. As a result you could end up with less money than the actual payout amount. So if you are considering cashing in your life insurance policy early, it is important to carefully review the terms of your cover.
Please note: The insurance products offered by Cavendish Online have no cash-in value at any time. If you stop paying your premiums your cover will stop, your policy will end, and you will receive no benefit. If you have not claimed before the end of your chosen policy term, the policy will end, and no benefit will be paid.
If you are facing financial difficulty, please contact your insurer before cancelling your policy or letting it lapse. They may have options available that means you don't have to lose the plan.
Where can I get help with my policy?
To bring it all together, here are our top tips for making the payout process as straightforward as possible for your family:
Read through your plan - get to grips with your insurance policy, and keep your loved ones in the loop
Keep everything safe and handy - make sure it is easy for your beneficiaries to find what they will need
Keep an eye on the direct debits - ensure that the policy stays active by keeping up with the premium payments
Keep in touch - make sure you update your insurer of any big changes to your situation, and reach out for support if you are in any doubt about how it all works
Cavendish Online is committed to the relentless pursuit of our customers best interests, and are happy to offer support to anyone with questions about how to make a claim or needing help understanding their insurance policy. For a helping hand, please get in touch to speak with one of our expert advisors, call us today on:
