When the insured person passes away, the named beneficiary (or beneficiaries) must file a claim with the insurance carrier to receive the death benefit. The claims process typically begins with notifying the carrier of the death, submitting a certified death certificate, and completing a claim form. Most carriers process valid claims within 30 to 60 days, though simple claims with complete documentation may be paid more quickly.
Beneficiaries generally have several options for how to receive the death benefit. The most common is a lump sum payment — the full death benefit amount paid in a single check or electronic transfer. Other options may include installment payments (structured over a defined period), an interest-only option (the carrier holds the benefit and pays interest to the beneficiary, who can withdraw the principal at any time), a life income option (converting the benefit into an annuity that pays for the beneficiary's lifetime), and a fixed-period option (equal payments over a specified number of years).
The death benefit is generally paid income tax-free to the beneficiary under current federal tax law. If the benefit is held by the carrier under the interest option, the interest earned is taxable. If the policy was in force during the first two years (the contestability period), the carrier may conduct a review of the application before paying the claim. Claims may be delayed if the death certificate is pending, if the cause of death falls under specific policy exclusions, if the policy has outstanding loans, or if beneficiary designations are disputed.
For policies with outstanding loans, the loan balance (plus accrued interest) is deducted from the death benefit before payment to the beneficiary. If multiple beneficiaries are named, each receives their designated percentage of the net death benefit. If no beneficiary is named or all named beneficiaries have predeceased the insured, the death benefit is typically paid to the insured's estate and may be subject to probate.