In the vast majority of cases when a person passes away and is covered by life insurance, the amount written into the policy is paid to their beneficiaries. Once the company has paid the life insurance settlement per the policy the recipients will be responsible for paying any expenses realized by the individual’s death. However, in some cases there may be questions surrounding the veracity of the information submitted on the insurance application and the life insurance settlement may be less than the face value of the policy.
There are also times, especially with whole life policies, where the policy owner has taken out a loan against the policy. In this event, the life insurance settlement would be for the face value of the policy minus the amount of the loan still owed and any associated costs of administrating the loan. Remembering that the policy holder is not always the same as the insured named in the policy.
Depending on the face value of the policy and any stipulations written into the policy, the life insurance settlement can be paid in one lump sum, by monthly payments over a set time or by other arrangements contained within the policy. Many times a survivor is expecting to receive a lump sum of money when a rich relative passes away and then finds out the life insurance settlement will be in monthly payments over many years.
Protecting Survivors From Tax Obligations
Many times a person will stipulate the life insurance settlement be paid in monthly or annual installments, partially to protect part of the money from income tax. The recipient can include the amount they receive each year on their income taxes while the rest remains in a savings account, accruing interest and not taxable until received by the beneficiary.
The deceased may also want to protect the recipient from their own bad spending habits, believing that if the life insurance settlement is paid all at once the money will not last very long. These types of directions for the life insurance settlement are common among most insurance carriers but some of the low cost life insurance policies available simply pay out to the beneficiary the face value of the policy upon their demise.
There may also be occasions when the cause of death is questioned and the insurance company may attempt to lower their obligation for the life insurance settlement. In these rare instances, legal help may be needed to insure the beneficiaries receive all of the money to which they are legally entitled.