What is a life insurance payout?
[social_share]One of the most important concepts in life insurance is the payout. It’s important for a policy holder to understand what a payout is and how it works.
A payout is the sum of money paid to the beneficiary of the life insurance settlement if the policy is activated, usually on the death of the person insured, but it can also be paid to the life insurance policy holder if the payment is the result of a disability.
There are two types of life insurance payouts. The first is the fixed payout, which is more common. This is a fixed amount that’s paid if the life insurance policy is triggered. Another type of life insurance payout is comparatively rarer. This type, called investment linked life insurance, pays out whatever the investments have earned. This tends to be offered by whole of life insurance policies, which are almost unknown in Australia but are relatively more common in the UK and the USA.
The payout will usually follow the beneficiaries named in the life insurance policy. The beneficiaries are often set at the policy’s start, although they can be changed if the policy holder wants to. With some life insurance policies, particularly those arranged through the policy holder’s employer, the person named as the beneficiary will only have an advisory status; that is, the beneficiary can be changed to the spouse or next of kin.
Multiple payouts are also allowed, although in reality the payout is split between the beneficiaries rather than multiplied. The payout will be split in the proportions determined by the policy holder.
If there is no beneficiary named by the life insurance policy, or if the person named has died before the policy holder, then the payout will be added to the estate of the deceased. This will then be allocated as the will dictates, just as the policy holder’s general assets are allocated.
Some life insurance policies also provide payouts through a disability clause. In these cases the payout will go to the life insurance policy holder rather than his or her beneficiaries.
