When does life insurance pay out?

Life insurance is designed to help provide financial security and peace of mind, yet many people remain confused about its terms and conditions. The idea is simple: in exchange for your premium payments, your family/loved ones are supposed to receive a lump sum if you die. But when exactly does that happen, and what factors can influence the payout?

In this article, we'll look at the main types of life insurance and how each policy pays out, as well as the circumstances that can affect the payout process.

When does term life insurance pay out?

With term life insurance, you choose how long you want the policy to last, ideal if you need cover for a certain timeframe, such as while your children are growing up. Term life insurance pays out a cash lump sum, providing you die within the policy term. It won't, however, pay out if you outlive the policy term, expiring without any benefits. Since a payout is not guaranteed, the premiums for this policy are usually much cheaper than guaranteed life insurance. 

So as long as the premium payments are up to date and the insured passes away during the specified term, the policy pays out as normal.

Other policies like decreasing term life insurance work similarly, however, the payout decreases over time, usually in line with a specific debt or obligation, such as a mortgage balance. Since the level of cover is decreasing over time, the premiums are usually a bit cheaper than level term cover.

When does whole life insurance pay out?

Whole life insurance is a type of permanent cover that protects the policyholder for the rest of their life, as long as premiums are paid. This means that regardless of when you pass away — whether it's shortly after purchasing the policy or decades later — the policy will pay out a death benefit to the beneficiaries.

The payout from whole life insurance is essentially guaranteed, however, if the premiums are not paid, the policy may lapse, and the beneficiaries will not receive any death benefit. It's also important to mention that the premiums for this policy generally cost more than term life insurance, so be sure to speak to an adviser to weigh up all your options. 

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Why wouldn't a life insurance policy pay out?

There are several reasons why an insurer may deny a claim made on your policy, such as if there are unpaid premiums. The cause of death could also impact a claim. For instance, if your death was caused by suicide within the first two years of purchasing the policy, many insurers may invoke a suicide clause, potentially denying the payout.

Deaths caused by illegal activities or while engaging in high-risk activities may also lead to a denial of the claim. If there was any information left out of the application — such as pre-existing health conditions — insurers could reject a claim based on a lack of disclosure.

Who gets your life insurance payout when you die?

When you apply for cover, you'll be asked to designate a beneficiary/s who will receive the pay out from the policy upon your death. A beneficiary can be anybody you choose such as family or friends, or even charities or trusts.

How much does life insurance pay out?

The pay out value of your policy is determined by the amount of cover you select when purchasing the policy. This amount can vary widely based on your needs and financial situation. Some people choose a higher cover amount to ensure their loved ones have adequate support for expenses such as mortgage payments, education costs, or other debts.

For more information please read our guide: How much life insurance do I need?

If you're interested in buying life insurance cover but don't know where to start, Cavendish Online can help. Our friendly team of advisers are on hand to answer any questions you may have as well as talk you through your options. Contact the team today to get started.