What happens if the insured person dies?
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UPDATED: Jul 16, 2021
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Larger claims (often those in excess of $10,000 to $25,000 depending on the life insurance company) are often paid in a lump sum by means of a “checkbook instead of a check.” The insurance company deposits the proceeds, and any interest earned from the date of the insured’s death, into a special account generically known as a Beneficiary Access or Retained Assets Account.
The insurance company immediately sends the beneficiary a book of checks or drafts. As the beneficiary can immediately write checks to pay any bills or to obtain cash there is fast and convenient access to the funds, without waiting for a large check to clear. These accounts are free and also pay interest, often at a rate significantly higher than is available for similar accounts from most banks.
A beneficiary is under no obligation to maintain the retained assets account and can simply write a check for the full amount and close the account, although most beneficiaries do maintain at least some of the money in the retained assets accounts for at least 6 months to 2 years. The interest rates are often very favorable, the proceeds are backed by the full financial strength of the insurance company (and in many cases further backstopped by the applicable state life insurance guarantee fund), the account is free, and funds are readily accessible. The retained asset accounts also help people mentally separate their life insurance proceeds from their other everyday money. However, just as it is often unwise to hold all one’s assets in any one bank or brokerage firm, holding all one’s assets at one insurance company is not necessarily wise, so consider some diversification.
Once proof of the death is submitted to the insurance company, and it is clear that the necessary premiums to keep the policy “in force” were paid to the date of death, the life insurance company should promptly pay the benefits, assuming that everything is in order and the policy has been in effect for at least two years. (Once the policy is at least two years old it is beyond the “incontestable period” and must be paid, except in extraordinary circumstances.)
Even if premiums on the policy were not currently being paid, the policy may have been in a “paid up” status, and thus remained in force, or the company may have failed to send the necessary notices of cancellation, or be able to prove it had sent such notices, in which case it may be possible to recover on the policy.
Typically the beneficiary — the person who is entitled to receive the benefits — provides the insurance company with the “proof” of the death required by the policy. A certified copy of the death certificate (typically with a “raised seal” from the County Clerk’s Office) and the life insurer’s claim form are normally sufficient, but it is necessary to file them; just because the company may have been able to read about the death in the papers, or also was the health insurer, is not sufficient.
Processing a policy death claim should take only one to four weeks from the time the insurer’s claims office has all the needed paperwork in the standard case, if it does not, you may have a problem case (see below) or an insurer acting in bad faith.