If you know you’re a beneficiary on a life insurance policy, you have protection for your financial future. Life insurance is often purchased to make sure that family members can pay bills, go to college or even support a family business if the insured person passes away. 

Sometimes another person owns a policy and has made you the beneficiary, such as a parent who intends to have a payout go to an adult child. In other cases a person owns a policy on someone else and is also the beneficiary, such as someone who has insurance on their spouse.

Here are important things to know about payouts to life insurance beneficiaries. 

You Don’t Need the Paper Policy in Order to Make a Claim

We all know that paperwork can get lost over the years, such as a life insurance policy. But if you’re a life insurance beneficiary, you don’t need to hunt for paperwork to start a claim. You only need to know the name of the life insurance company.

From there, you can contact the insurer to let them know of the death of a customer and get the claim form. 

Once you have the claim form from the insurance company, you’ll also need a certified copy of the death certificate. Then you’ll be ready to submit the paperwork and make your claim.

Life insurance benefits are paid tax-free to the beneficiaries, no matter how large the amount is. The IRS says you don’t have to report life insurance proceeds as income, unless the policy was transferred to you for cash or other “valuable consideration,” which doesn’t apply to most beneficiaries.

The face amount is the amount of money stated on an application, such as $1 million. But it may not be the amount available to beneficiaries after the death of the insured person.

If the policy was a cash value life insurance policy, and the policy owner took withdrawals against the cash value or loans that weren’t paid back, the life insurance company will reduce the payout accordingly.

For example, if the policy face value was $1 million but the policy owner took a $50,000 loan from cash value and didn’t pay it back before death, the life insurance payout will be reduced by $50,000 plus any loan interest. 

Since a beneficiary may not know about a policy owner’s actions, this could be a surprise. 

A life insurance policy is a contract, and the insurance company is obligated to pay only claims made by the beneficiaries listed on the policy. The life insurance contract also overrides any heirs named in a will. 

So even if someone else is arguing that they deserve the money and are going to make a claim, talk like that is inconsequential if they’re not listed on the policy.

The life insurance contract outlines each beneficiary’s percent of the payout. It’s possible that you could make a claim and find that you’re one of multiple beneficiaries. So who are the other people? The life insurance company keeps that private. 

Similarly, someone who’s not the policy owner can’t call up the life insurance company and find out who the beneficiaries are on someone else’s policy. 

People often avoid discussing their finances. Money and decisions over the years could have impacted a policy on which you were a beneficiary, and you won’t know it unless someone tells you. 

If a policy owner stopped paying and let a policy lapse, there’s no payout to collect. If the payments stopped recently—for example, because the policy owner was ill in the last month of life—you can likely pay the back premiums and still make the claim.

A life insurance company doesn’t necessarily know right away that an insured person has died. If you know you’re a life insurance beneficiary, you should be proactive and contact the company to start a claim. 

Under legal settlements in recent years with many states, insurers are now required to regularly check for the deaths of policyholders. They do this by checking their customer lists against a government database of deaths. 

You don’t necessarily have to take the entire life insurance payout in one lump sum. Insurers typically offer choices for receiving the money, such as:

Installment payments, such as equal installments over five years.

Regular payments for the rest of your life. Much like an annuity, the insurance company offers regular payments for the rest of the beneficiary’s life. But once the beneficiary passes away the payments stop, even if the original death benefit hasn’t been fully paid yet.

And possibly other options.

Once you’ve submitted the claim paperwork (claim form and death certificate), payment can be fast. It could be within a week in some cases, but you should generally have the money within 30 days.