Life Insurance Payouts

Find out more about how life insurance payouts work and who they can go to with Savvy.

Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on July 10th, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

Life Insurance Banner - Elderly couple looking at life insurance policies on a laptop

Receiving a payout is the main reason why people choose to purchase life insurance in the first place. It provides them and their families with a financial safety net should they pass away or become terminally ill. As such, it’s worth understanding how life insurance payouts work. Learn about who your payout can go to and when they're made with Savvy today in our helpful guide.

How do life insurance payouts work?

A life insurance policy typically comes with a single lump sum payment, often known as a life insurance payout or benefit, which is passed onto either you or your family depending on the nature of your claim. In most cases, this payout will be valued at between $100,000 and $2 million, which will be determined by the amount of coverage you chose when purchasing your policy.

As part of the life insurance purchase process, you’ll be required to nominate life insurance beneficiaries, which will typically be between one and five individuals. These may consist of a partner or spouse, child, grandchild, close friend, business partner or someone you otherwise trust and have a strong relationship with. When your life insurance policy pays out, the benefit will be dispersed between your nominated beneficiaries.

When will my life insurance pay out?

There are two main situations after which a life insurance policy will pay out:

The policyholder passes away

Most life insurance policies are settled upon the death of the policyholder. In this situation, one or more of the beneficiaries will need to get in contact with the insurer to alert them of the fact that the holder has passed away. In most cases, this will only require the beneficiaries to submit policy information, primarily the number, and the medical records and death certificate of the deceased to the insurer, though accidental deaths may require more information for claims to be fully assessed.

The policyholder is diagnosed with a terminal illness

Payouts aren’t just provided when you pass away, though. Insurers can also pay out your benefit if you’re diagnosed with a terminal illness and are deemed to only have a life expectancy of up to 12 to 24 months. There may be more information and documentation required in the case of a terminal illness, as you’ll generally need to have at least two confirmations from different medical professionals confirming your illness and life expectancy. As is the case in the event of a death, your condition and medical records will need to be assessed before a payout is made.

What are some of the reasons why my life insurance won’t pay out?

There are several circumstances where a life insurance claim may be denied, so you and your beneficiaries need to be aware of these before attempting to make a claim. Some of the main reasons why your life insurance won’t pay out include:

  • Death by suicide within the first 13 months of coverage
  • Death due to an undisclosed pre-existing condition, such as high blood pressure or heart disease
  • Death due to a non-covered incident, such as relating to drugs or alcohol
  • Death overseas in a country with a government-issued travel warning
  • Premium payments weren’t up to date and/or the policy lapsed

Is there any tax payable on life insurance payouts in Australia?

Life insurance payouts typically aren’t considered taxable income for any dependent beneficiaries of a policy, such as a young child or spouse, so they wouldn’t have to pay tax on their lump sum in this situation. However, if your beneficiary isn’t a dependent, such as an adult child who no longer relies on your income for support, their portion of the payout may be subject to tax.

Superannuation life insurance also comes with its own tax rules, such as exempting former spouses and any other beneficiary who shared an interdependent relationship with the policyholder. However, it’s worth consulting a financial professional if you’re unsure about these rules. Finally, ongoing benefits from income protection insurance are also taxed, as these are different from the lump sum payout received from other types of cover.

Frequently asked questions about life insurance payouts

Can any advance life insurance payments be made to cover funeral costs?

Yes – most life insurance policies come with provisions for the advancement of part of your benefit to help cover immediate costs after your death, such as those relating to your funeral. This can range from $15,000 to $30,000 or more.

What happens to my life insurance payout if I have a joint policy with my partner?

If you share a life insurance policy as a couple and one of you passes away, the other partner will receive the payout and coverage will cease. If you and your partner decided to take out separate policies, you could both receive a lump sum payout upon your death or terminal illness diagnosis. It’s worth exploring which option is best for you, which you can do right here with Savvy by comparing offers from some of Australia’s leading life insurers. It’s something you might look to explore if you’re getting older, even if you’re over 40, and want to ensure protection for your partner and family.

Do superannuation life insurance policies pay out on suicide?

Just like standard policies, life insurance through your superannuation will typically cover death by suicide outside of the initial 13-month exclusion period. If this occurs within this period, your beneficiaries’ claim will be denied and your policy won’t be paid out.

How can my family or I use my life insurance payout?

There are no real restrictions on how you can use the funds received from a life insurance payout. Some of the ways you may wish to make use of the money from your loved one’s policy include:

  • Travel and accommodation costs
  • Treatment costs if paid out on a terminal diagnosis
  • Palliative care costs
  • Funeral expenses
  • Real estate fees relating to the sale of their home
  • Any other personal investment causes after they pass away

Helpful life insurance guides

Life Insurance Banner - Elderly couple buying life insurance on their tablet

Buying Life Insurance

Find out more about the process of buying life insurance and how to compare offers with Savvy. Making sure your...

Life Insurance Banner - Young couple lying on the ground while moving house surrounded by boxes

Cheap Life Insurance

Compare life insurance policies with Savvy to help you find the cheapest deal on offer from a panel of leading...

Life Insurance Banner - Senior couple looking at a laptop by the pool

Whole Life Insurance

Find out about whole life insurance and how it worked in Australia right here with Savvy. Whole life insurance (or...

Life Insurance Banner - Woman sitting on the couch on her laptop with a man standing next to her pointing

Life Insurance Exclusions

Find out some of the typical life insurance exclusions right here with Savvy. When you purchase life insurance, taking note...

Life Insurance

What Is Life Insurance?

Find out what life insurance is and how it works with Savvy today before buying your policy. Life insurance is...

Compare life insurance policies side-by-side

Through Savvy, you can consider a range of competitive life insurance policies from reputable insurers, whether you're after life, income protection, trauma or TPD cover. Get the ball rolling on comparing your available options today!

Disclaimer:

Savvy is partnered with Compare Club Australia Pty Ltd (AFS representative number 001279036) of Alternative Media Pty Ltd (AFS License number 486326) to provide readers with a variety of life insurance policies to compare. Savvy earns a commission from Compare Club each time a customer buys a life insurance policy via our website. We don’t arrange for products to be purchased from these brands directly, as all purchases are conducted via Compare Club.

Savvy does not compare all life insurance policies or providers currently operating in the market. Any advice presented above or on other pages is general in nature and doesn’t consider your personal or business objectives, needs or finances. It’s always important to consider whether advice is suitable for you before purchasing an insurance policy.

For any further information on the variety of insurers compared by Compare Club or how their business works, you can read their Financial Services Guide.