Given the size of the life insurance policies our individual and institutional clients purchase, one question inevitably pops up, “How does a claim for the death benefit work?”
This gives our team the opportunity to mention one key step a policy-owner can make right away to eliminate some of the hassle in filing a claim and the beneficiary receiving the proceeds – making it as easy as possible for the insurance company to identify and find the beneficiary. As a recovering life insurance company executive, I have many stories around the haphazard completion of the beneficiary section of an application. Usually, a beneficiary’s social security or taxpayer ID number is omitted but trouble also derives from not properly listing a beneficiary’s full legal name, leaving out a middle name or initial or a mistake in a date of birth. We all know there are a lot of similar names out there!
Even when the beneficiary section is satisfactorily completed, not updating a name change or the address or location of the beneficiary can cause confusion and delay when it comes to either finding a beneficiary (sometimes there are several!) or increasing the likelihood that a beneficiary will know about the death. This latter concern can be mitigated by having advisors such as an insured’s attorney or trustee knowing the identity of any beneficiaries and alerting them when the time comes.
In a perfect world, the policyholder will have provided the following identifying information for each beneficiary:
Full name, correctly spelled, including any middle names
Any maiden or former names
Date of birth
Social security number or Taxpayer ID number
If not a U.S. citizen, their nationality and passport number
Get a Copy of the Paperwork
Paperwork can get misplaced. People – and even institutional policyowners - grow forgetful, or sometimes pass away before giving beneficiaries the information they should have. If you believe you are named as a life insurance beneficiary, check online with the National Association of Insurance Commissioners' Life Insurance Policy Locator Service, which searches a database of known policies from participating companies. However, understand that this will not always work because life insurance companies have privacy protocols and will typically respond to the request only if they have reason to believe there is a policy in the name of the deceased, and you are entitled to death benefits as a designated beneficiary, or authorized to receive information.
You Will Not Be Paid Tomorrow
Another reason to have collected the policy documents is that they will tell you everything needed about the coverage and how to file a claim. Don’t worry – even if you don’t have the paperwork, you should be able to begin the claims process if you have these three things:
The name of the insurance company
The policy number
The insured’s death certificate
While every company’s process varies somewhat, you’ll basically have to fill out a claims form called a “Request for Benefits” and provide a copy of the death certificate. If you are in touch with the insured’s insurance producer of record, they can help you through the claims process. For most of our clients, this is not a problem but, with the rapid aging of the life insurance producer community, by the time a claim is filed for policies recently issued, the current producer of record could well be incorrect or an unrecognizable name. Again, do not be concerned – just Google “File death benefit claim - [Company Name]” for the contact information you need to file.
Once the insurance company has received a claim, they will verify the information and likely pay out death benefits within one to two months of the date the claim was filed. At this point, the insurance company is likely going to want to keep as much of the death benefit as possible for as long as possible and the beneficiary will be given a choice of getting your payout in one of 3 different ways:
1. A Lump Sum Payment
As expected, this is the most popular option, and usually the default choice. For the most part, the beneficiaries of our clients’ policies already have plans for the money and have yet to choose another payment option. The death benefits we see paid are used to meet transfer tax liabilities, other financial obligations or invested by in-place advisors.
2. An Annuity
Much like what happens when someone wins the lottery, the annuity option is never chosen. If it was, though, an annuity can provide a beneficiary with a stream of income payments created from the death benefit proceeds used to purchase the annuity. The income payments will start on a date in the future that the beneficiary selects. The beneficiary should consider their liquidity needs before any money is used to purchase the annuity.
When my maternal grandfather died, I was 21 and going to university in the same city. I was with my grandmother when the Knight of Columbus Insurance Company representative stopped by and tried to convince my grandmother to accept an annuity instead of the death benefit. She was 78 and (more politely than I would have if I knew what I know today) declined the annuity.
3. Installment Payments
The beneficiary can also choose to have the benefit amount paid in a series of payments over time. The insurance company holds the money in an account that pays interest and sends a monthly check for whatever amount chosen until the principal runs out. This option can give more control over payments compared to an annuity. For instance, if the beneficiary needs more financial resources each month, they can up the amount. Conversely, the beneficiary can stop taking payments for a while and let the principal grow until more is needed.
A huge downside for this mode of death benefit payment is that the interest rate is going to be a fixed rate that is just a bit better than a savings account. Beneficiaries surrounded by professional money managers are likely better off taking the lump sum and investing it.
It Could Be Worse
In my time running international, HNW life insurance distributions, there were unique death claim situations that required additional resources and steps. For instance, one insured was lost in the 2004 Indian Ocean Tsunami. Since a body was not recovered and it would therefore take a long time to obtain a death certificate, the reinsurance company used an investigator to track the client to the resort where they were staying when the tsunami hit. The investigator collected credit card transactions and travel receipts as well as evidence of the lack of activity after the tsunami to support payment of the death benefit.
Very early in my career, reinsurers collected fingerprints and DNA from some Latin American insureds to confirm identity. This was mainly due to the lack of data collection that could be performed (mostly electronically) and the lack of experience in U.S. or Bermuda-based insurers had with death claims for multimillion dollar face amounts.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.