How do life insurance payouts work?

A life insurance payout goes to whoever is listed as the beneficiary on the policy which is decided by the person who takes out cover. Luckily, payouts tax-free and can pay out more than $1 million. On average, it takes insurers 2.5 months to accept or reject your claim but processing usually only takes around 2 weeks.

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.

Finder survey: Do people think life insurance is worth it?

How long does it take life insurance to pay out?

In most cases, a life insurance payout should take less than two weeks to be processed. However, this is just the processing time. It usually takes insurers longer to decide whether to accept or reject your claim. According to the latest APRA data, it takes life insurers (policies bought online) an average of 2.5 months to do this.

NobleOak has the shortest average claim time of 0.9 months. TAL take an average of 3 months and Clearview takes 5 months.

Processing times

Processing times are shorter. According to the latest Australian Prudential Regulation Authority (APRA) data on this:

• 71% of life insurance claims are processed in less than 2 weeks
• 19% take between 2 weeks and 2 months
• 7% take between 2 and 6 months
• 2% take between 6 months and 12 months
• 1% take longer than 12 months to be processed.

Can life insurance pay out before death?

Yes, this is known as a terminal illness benefit and it's included in most policies. For this to happen, your medical practitioner needs to state that you don't have much longer to live. Depending on the insurer, you can generally have your insurance paid out if it is documented that you have less than 12 months or 24 months left to live.

To claim under a terminal illness benefit, the process is much the same. You or the beneficiaries you've listed need to call the insurer and they'll provide you with the paperwork and next steps you need to take. Hopefully, it's a relatively straightforward process for you during this incredibly difficult time.

Compare life insurance policies in Australia

Finder Score - Life Insurance

Life Insurance is a little complicated and a lot overwhelming. That's why we made the Finder Score, to make it easier to compare Life Insurance products against each other. Our experts analysed over 20 products and gave each one a score between 1 and 10.

But a higher score doesn't always mean a product is better for you. Your situation is unique, so your policy choice will be too. Don't think of Finder Score as the final word, but as a good place to start your life insurance comparison.

Read full Finder Score methodology

FAQs about life insurance payouts

• Do you pay tax on life insurance payouts in Australia?

  No. Life insurance payouts are usually tax free. This means that if you've selected a payout of $1 million, that's exactly how much your beneficiaries will receive.

• 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.