How do life insurance payouts work?

A life insurance payout is a one-off tax-free payment that can be given to your loved ones when you die.

Life Insurance

Key takeaways

  • Life insurance payouts are generally between $100,000 to $1.5 million in Australia.
  • Across all channels and types of life insurance cover, the average wait claim time was 2.4 months.
  • Benefit payouts are tax free if your listed beneficiaries are financial dependents. Non-dependents can be taxed up to 30%.

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.

One

Call the insurer

The insurer's information should be available on the policyholder's certificate of insurance.

Two

Provide them with a death certificate

You'll need to submit a certified copy of the death certificate when you get in touch with the insurer. This is so they can verify that the policyholder has passed away.

Three

File a claim

The insurer will send you a claims form. You'll need to fill that out and provide any information it asks for. For example, the insurance policy details outlining that you are the person the policyholder has listed as their beneficiary. You can usually fill it out and submit online.

Four

Wait for your life insurance payout

Life insurance payouts are usually made to the beneficiary within two weeks of the claim being submitted. If your claim is denied, you can file an internal dispute with your insurer or the Australian Financial Complaints Authority.

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 coverAll channelsSuperannuationFinancial AdviserDirect
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

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Gary Ross Hunter has over 6 years of expertise writing about insurance, including life, health, home, and car insurance. Having reviewed hundreds of product disclosure statements and published over 800 articles, he loves simplifying complex insurance topics for everyday readers. Gary has contributed to major outlets like Yahoo Finance, The Sydney Morning Herald, and news.com.au, and holds a Bachelor of Arts (Honours) in English Literature from the University of Glasgow, along with a Tier 2 General Advice certification, ensuring his work adheres to ASIC’s RG146 standards. See full bio

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