Ways to collect from a life insurance policy

Life insurance is peace of mind that our families would be financially taken care of should we pass away. But, did you know that there are in fact 4 ways to collect from a life insurance policy? In this guide, we would go over the ways a policy would payout, even if you are still alive. Our goal is to answer many of the procedural questions we’ve received throughout the years and shed some light on your options.

We would be covering the topic from the most well-known option to the one that not many people are aware it even exists. Keep reading and feel free to reach out to us should you have any questions.

4 ways to collect from a life insruance policy. Image of a dad and his daughter

Ok, let’s dive in…

1st way to collect from a life insurance policy: Death Benefit

Ok, this comes as no surprise. After all, this is what this product is designed to do: payout when the insured passes away. We’ve covered many of the basics of life insurance and have listed some of the most common questions about life insurance.

But some questions remain:

How exactly out beneficiaries would collect the money? In other words, what forms they need, how lengthy his the process, and are there any instances when a life insurance policy will not payout? We will break these questions one by one and provide you with the answers:

Q: What does the death claim process consist of?

A: The beneficiary needs to reach out to the company and file a death claim. In other words, he or she needs to notify the company that the insured had passed away. The company will send out a death claim package forms (or allow for it to be completed online). The beneficiary needs to submit the following documents:

  • Proof of death – typically a death certificate (make sure you have extra copies)
  • Complete the death claim form
  • Obituary listings, if available
  • Provide proof of identification  

*Here is a guide on how to how to locate life insurance policy information if you are not sure the name of the company.

Q: How long before the beneficiary can expect to receive the payout?

A: The answer depends on several factors. However, in many instances, the companies are striving to issue payment as soon as all forms are received in good order. 

In some cases, the process may be a bit longer if the insured had passed away during the contestability period of the policy. *

*Contestability period is standard in the insurance industry. It is 2 years from the policy issuance. Should the insured passes away during the initial 2 years, the life insurance companies reserve the right to re-open the application and see if there are any errors or misrepresentations on the application.

Therefore it is essential to be truthful and upfront when answering all the questions. You do not want to give the company a reason to contest and possibly decline the claim. 

Q: Are there circumstances when benefits are not paid? 

A: Here are the most common exclusions.  They will be spelled out and listed in the policy. A company can not change or add exclusions after the policy is in effect:

  • Should the insured pass away during the contestability period (see above). 
  • A common exclusion is suicide committed during the first 2 years of the policy.
  • Illegal activity – Simply put, a life insurance company would not pay out the death benefit if you died while involved in illegal activity.
  • Act of war – Some life insurance companies have this exclusion. It means that if you die as of the result of war, the insurance company may pay out the death benefit.

There could be additional exclusions. Be vigilant and review your policy as soon as it is issued to ensure it meets your needs. 

2nd way to collect from a life insurance policy: Cash Value Accumulation

Now, this may not come as a surprise to many, but we wanted to touch on cash value. Most permanent policies have a cash value account where funds are being accumulated. The unique thing is that the funds may receive favorable tax treatment and grow tax-deferred. Meaning, you do not pay any taxes on the growth. 

You do not have to have any special conditions to access the funds. In other words, you can withdrawal at any given time and do not have to provide the company with a reason. The disbursements could be in the form of:

  • Withdrawals
  • Loans against the cash value
  • Cash surrender the policy.

Here is the catch,

You need to pay close attention to policy performance. While having access to the cash value is great, not monitoring the policy performance could be detrimental. It is very important to have a current illustration after you take money out to ensure the policy is properly funded.

3rd way to collect from a life insurance policy: Return or Premium 

There are 2 ways you can access the return of premium and collect from your life insurance policy:

Stand-alone return of premium insurance – typically, these are term insurance (10,20 or 30 years). At the end of the term, if you are still alive and the policy is active, you would receive all of your money back. Essentially, you had a life insurance policy for free. Great, right!

Here are the downsides:

  • Return of premium policies do cost approximately 30% or more compared to a traditional policy
  • You need to keep the policy to the end of the term to exercise the option
  • There is no interest on the money. You might be better off to have the extra premium and contribute towards your savings or retirement account.  

There are permanent policies with the option to cash surrender the policy at year 15, 20 or 25 years

In other words, the company would allow you to cash surrender the policy and receive a full refund. We believe this might be a good option, as you have the choice to surrender or not. As your needs change, you might realize that you do need to keep the policy and not exercise the option. On the other hand, should your needs change, and you no longer need insurance – you surrender it and get your money back.

Here is a complete guide on Return of Premium outlining the only option we recommend and 4 reasons why.

For us, having the choice and the ability to decide what’s best for you makes a ton of difference. 

4th way to collect from a life insurance policy: Living Benefits 

This is an option that not many people are aware of. You can access your death benefit, while still alive. Essentially, adding an extra benefit turning traditional death insurance, to life insurance.

In a nutshell, here is how the extra benefit work:

Should be diagnosed with a common health condition such as invasive cancer, heart attack, or stroke, you can file a claim against your life insurance policy and accelerate your death benefit. The money is payable to you and you decide how to spend it. You can use it to cover your medical bills, hire extra care around the house, put food on the table, or even take your family on a last vacation.

Here are some highlights:

  • Living benefits are available on term insurance, as well as permanent policies
  • You do not have to pay them back
  • You need a qualifying event (trigger) to have access to the funds.

We’ve created separate guides on whether living benefits are worth it and some of the most common questions we’ve received about the product.

Bottom Line

Life insurance is an important financial tool with many benefits. There are more ways to collect from a life insurance policy than simply passing away. Feel free to reach out to us if you have any questions on the options we discussed and if you would like us to take a closer look at your personal situation. 

Thank you!