The beneficiary of a life insurance policy is the person entitled to receive the death benefit of the policy when the insured person dies. In order to collect on a death benefit claim, the beneficiary must usually comply with specific duties and procedures stated in the insured's life insurance policy (usually set out in the "Conditions" section). While contract conditions may vary according to the terms of a particular policy, most life insurance companies require prompt notice and proof of death (i.e., a death certificate) from the beneficiary.
Once the beneficiary has complied with the life insurance company's claim form and filing requirements, processing the policy death claim should take one to four weeks. However, failure to perform the duties specified in a policy could relieve the life insurance company of its obligation to pay the claim. Further, the life insurance company's obligation to pay a death benefit claim hinges on several considerations, including what type of policy the insured person held and how long the policy has been in effect.
The Effect of Term or Permanent Life Insurance on a Death Claim
A life insurance beneficiary's eligibility to receive a death benefit may depend on the type of life insurance policy the insured person held. If the insured had a "term policy" (life insurance protection for a specified period of time), then the beneficiary will typically only receive the death benefit if the insured died before the end of the term. On the other hand, the beneficiary's right to receive payment for a death claim is different if the insured had a "permanent policy" (life insurance protection for the insured's entire life).
Specifically, the beneficiary of a permanent policy will receive the death benefit if the death occurred while the policy was "in force," which means that all premium payments were made up until the time of death. However, if the insured stopped making premium payments before the time of death, the permanent policy has "lapsed" and the beneficiary might not be entitled to receive the death benefit. Rather than deny the death claim of a beneficiary when an insured's permanent policy is lapsed, most insurance companies switch the status of the insured's policy to one of the following:
- "Extended term" – insurance company uses cash value of the lapsed permanent policy to buy a short-term life insurance policy
- "Reduced paid up" – insurance company keeps the permanent policy in force but reduces the death benefit
Denying a Beneficiary's Claim on a Valid Life Insurance Policy
Once a life insurance policy has been in force for at least two years, the life insurance company cannot contest a beneficiary's death benefit claim, unless the insured did not pay the premium. However, if the insured dies within the "contestable period" of the policy (first two years), then the life insurance company can deny death claims based on any one of the following:
- Death of the insured is attributable to suicide
- Insurance policy procured by fraud
- Insurance policy procured by material misrepresentation
In fact, a material misrepresentation made by the insured in the original application for the insurance is one of the most common grounds life insurance company's use to deny death benefit claims. In many states, a misrepresentation is deemed to be material when the insurance company would have refused to issue the policy if it had known the truth. Because most life insurance companies consider the personal information of an applicant when calculating policy premiums, the most frequent material misrepresentations involve misstatements of health and medical history (by applicants seeking more favorable premiums).
Settlement Options for Death Benefits
Assuming that the beneficiary is entitled to receive the death benefit on a valid life insurance policy, the insurance proceeds will generally be paid in a lump sum or according to an option specified by the insured in the life insurance policy. However, most policies allow the beneficiary the right to choose an alternative settlement option, including:
- Interest Only – beneficiary receives interest on the proceeds held by the insurance company
- Fixed Period – beneficiary receives death proceeds for a specific amount of time
- Fixed Amount – beneficiary receives a specific amount of proceeds until the proceeds are exhausted
- Life Income – beneficiary receives a monthly payment for life, determined by the amount of the death benefit and the life expectancy of the beneficiary
Beneficiary Fails to Claim a Death Benefit
While there is no time limit during which a beneficiary must file a death benefit claim, a life insurance company will often lapse the insured's policy if it has stopped getting payments and cannot get in touch with the insured.
However, if the insurance company knows that the insured has died and cannot find the beneficiary, it is required to turn the full death benefit over to the state comptroller's department within three to five years. Under this scenario, the state comptroller's department includes the insurance proceeds among other unclaimed property belonging to the deceased, and keeps a database of lost beneficiaries.