How do life insurance payouts work?

How does life insurance pay out?

Generally, a life insurance payout is a one-off lump sum payment in the region of $100,000 to $1.5 million. It goes to the person or persons the policyholder (the person who has passed away) has nominated as their beneficiaries – this is usually a family member or loved one.

The beneficiaries of the person who died will generally need to submit a claim to the life insurer. Most people will be aware that they have been listed as the beneficiary – the person who took out the policy should usually inform you. But if you're not made aware, you can make a search on the ASIC unclaimed money register.

How do I receive a life insurance payout?

These are the four main steps to a life insurance payout.

How long does it take life insurance to pay out?

In most cases, a life insurance claim will take less than two weeks to be processed by an insurer. However, this is just the processing time. Whether an insurer decides to accept or reject your claim can take as long as a few months.

We've taken a look at the latest Australian Prudential Regulation Authority (APRA) data on claims performance to give you an idea of how long it might take for your life insurance claim to be paid out. The data is based on the average time it took Australian insurers to accept or deny a claim for death cover from July 2023 to June 2024. We've broken this down into the different ways most Aussies buy life insurance, including superannuation, using a financial adviser, or directly with a provider.

Here are some of the key findings:

• Across all channels and types of life insurance cover, the average wait claim time was 2.4 months.
• ClearView policies that were bought directly from the insurer had the longest average claim time at 5.6 months.
• Resolution Life policies purchased through a financial adviser had the fastest average claim time at 0.7 months.
• At 5.6 months on average, total and permanent disability (TPD) cover claims took the longest on average.
• Funeral cover had the shortest turnover time, with claim times of 0.6 months on average.

Life insurance claims times (months)

Types of cover	All channels	Superannuation	Financial Adviser	Direct
Death cover	1.7	1.0	1.4	2.7
TPD	5.6	4.2	7.0	N/A
Income protection	2.9	1.7	1.5	1.9
Trauma	1.4	N/A	1.4	N/A
Funeral	0.6	N/A	N/A	0.6

Are life insurance payouts tax deductible?

It depends on the type of policy you take out. For income protection insurance, it's likely you'll have to pay tax on the monthly benefits you receive, just like you would with your regular income.

However, payouts for other types of life insurance are usually tax-free. If the payment is made to a dependent, like a spouse or a child, it will be tax-free. This can include life insurance (death cover), trauma insurance, and total and permanent disability insurance.

The exception is when the life insurance benefit is paid to an adult who is not considered a financial dependent. In that case, the tax-free status could change, and the beneficiary could be taxed up to 30%. If the life insurance policy is purchased from your super, this can also include a medicare levy.

FAQs

• How is life insurance paid out to beneficiaries?

  Once a claim is successful, the insurer will arrange a cheque or direct deposit of the benefits payout to the listed beneficiaries on your life insurance policy. Depending on the life insurance type you'll either be paid in a lump sum or installments. Death cover, trauma cover, and total and permanent disability (TPD) insurance are usually paid out in lump sums, while income protection insurance will typically be paid in monthly instalments.

• Is life insurance paid out in lump sums?

  It depends on what type of life insurance you have. Death cover, trauma cover, and total and permanent disability (TPD) insurance are usually paid out in lump sums, while income protection insurance will typically be paid in monthly instalments.

• How much does life insurance payout?

  How much life insurance pays out is down to the policyholder. When you take out life insurance, you choose how much you want it to payout. For most insurers, you can choose between a $100,000 and $1.5 million life insurance payout. The bigger the payout, the more expensive your premiums are likely to be.

• What types of death will I not receive a life insurance payout for?

  Like all things in life, payouts for life insurance aren't always black and white. There are circumstances where a claim won't be paid — these are called exclusions. You usually won't be covered for death by suicide within the first 13 months of taking out a policy. There are also sometimes specific exclusions placed on policies on a case-by-case basis.

• What should I do with a life insurance payout?

  If you're the beneficiary of a life insurance payout, you have the freedom to use the money as you see fit. Paying off debt, investing it or putting it toward day-to-day expenses are all good ways to use a payout.