How Do Pay-Outs on Life Insurance Policies Work?

Understanding how life insurance works is key before taking out a policy. This includes the different types of life insurance, the benefits of the policy and how a life insurance policy will pay out.


At Caspian Insurance, we compare the UK’s leading insurance providers to help you find a policy that is suitable for you and your family. We are also here to provide helpful advice when it comes to understanding your policy. With that in mind, here is a guide to life insurance policies and how the pay-out works.


How does life insurance work?


Life insurance is designed to provide your loved ones with a cash pay-out if you were to pass away. It involves making monthly payments, which are often referred to as premiums. Depending on the type of policy you take out, it may only run for a fixed period of time.


It is important to remember that the pay-out amount depends on the policy type and level of cover you take out when you apply. The two main types of life insurance are term-based which lasts for a predefined term, and whole of life which has no expiry date.


The policy you choose will depend on what you are hoping to protect.


What are the types of life insurance policies?


There are a number of different types of policies, each with their own purpose. All offer some form of pay-out if you pass away within the policy term. The simplest form of life insurance is level term insurance, which works on a fixed basis and the pay-out amount does not change over time.


Similarly, decreasing term life insurance also runs for a fixed amount of time, but the pay-out amount will decrease over time; usually in line with a repayment mortgage. This is a suitable policy if your main concern is covering your repayment mortgage.


Other types of life insurance policies include whole of life and over 50s. Whole of life insurance is similar to level term in regards to the fixed pay-out amount, but the cover lasts for the rest of your life. Over 50s life insurance will guarantee acceptance with no medical information required.


A less well-known policy type is family income benefit. This offers a regular income for your loved ones for a set amount of time, instead of a lump sum pay-out.


Taking out a life insurance policy is crucial if you have dependents, such as a partner, children or other family, who rely on your income. The pay-out from your policy can be a financial safety net for your family, providing support at a time when it is needed most. .


Typically, the younger you take out life insurance, the more affordable it is. This is because you may be seen as a lower risk and may be prone to less health issues.


How does a term life insurance pay-out?


The pay-out amount remains the same whether the policyholder passes away at the start or before the end of the policy term, if a level term term policy was taken out. It is important to remember that if you pass away after your policy expires, there will be no pay-out.


The pay-out process can depend on whether you have written the policy into a trust. If you have, then you will have chosen trustees who will receive the pay-out and control it on behalf of the beneficiaries. Typically, beneficiaries can include your partner or children, but it can be anyone who you wish to benefit from the pay-out.


If you have not written your policy into a trust, the pay-out is usually paid into the deceased's estate and would be distributed in accordance with their will. If the deceased did not have will, the estate would be distributed in accordance with the rules of intestacy.


What do I do with a lump sum life insurance pay-out?


The pay-out from a life insurance policy can be used for a number of different things, for example, to help your loved ones continue paying important bills or covering living costs. Decreasing term life insurance is usually taken out purposely to cover a repayment mortgage.


You can use the pay-out to cover or contribute to funeral costs, additional childcare, household bills, school fees or other living costs that your loved ones may require financial help with. The pay-out from a life insurance policy is designed to offer those important financial provisions when they are needed most.


When do families get the full pay-out from a life insurance policy?


There is a process to go through in order to claim on a policy, which you must do before there will be a pay-out.


If the policy has been written into a trust, families may receive the pay-out quicker. This is because the money does not go through probate, and will usually be paid straight into the trust.


Each insurance provider will have different terms, so it is important to check with your insurer on how long it takes to pay a claim.


Please note that the guidance above does not constitute financial advice and may change depending on individual circumstances.