Life insurance payout rates explained

21 min Read Published: 18 Feb 2021

Life insurance payout ratesLife insurance claims are important to understand. You may have wondered what a life insurance claim involves and you may even have reservations about whether life insurance companies ever pay out. There are other considerations such as "What could cause a death claim to be declined?", "Who will receive a life insurance payout?" and "What if I don't nominate my beneficiary?". In this article, we will expand on life insurance claims paid as well as what you need to know.

Life insurance payout rates

What is a life insurance payout rate?

Life insurance companies often have more than one payout rate (sometimes called claims statistics). This is because there will be claims statistics for each type of insurance policy they sell. Amongst these, you'll find different types of life insurances as well as illness insurances such as critical illness insurance and sick pay insurance.

Life insurance payout rates are simply the percentage of total claims received by a life insurance company that result in a successful payout.

What are the payout rates for life insurance policies?

The rate of life insurance payouts is generally quite high and often much higher than most people predict. On the other hand, you may wonder why all life insurance policies don't pay out. Given that death is fairly final - surely there is nothing to contest. To understand this, we need to understand the caveats to a successful payout.

The average life insurance payout rate is around 98%, so the vast majority of policies do result in a successful claim. Many insurance companies publish their payout rates for transparency and some even explain the reasons behind the small number of claims that were declined.

Payout rates for each life insurance company in the UK

Life Insurance Company
Percentage of life insurance claims paid - 2019
AIG 98.0%
Aegon 97.0%
Aviva 98.9%
Canada Life 98.0%
Guardian not available - see below
Legal & General 97.0%
LV not disclosed - see below
Royal London 99.7%
Scottish Widows 99.0%
Vitality 99.5%
Zurich 99.0%

Guardian does not have statistics for claim payouts due to the short time that they have been in the market.

LV has not disclosed the payout rate specifically for life insurance and instead discloses an overall payout rate of 94% which includes payout rates for sickness claims. It is likely that the life insurance claim payout rate is higher than this figure.

How are life insurance claims assessed?

If a policyholder dies, it is usually a family member or next of kin who starts the process of a claim against the life insurance policy. It is vital that those in your life who will carry out this responsibility know about your life insurance and where to access the details.

The first thing that most people do is contact the insurance company and make it aware that the policyholder has passed away. Most reputable insurance companies have specific claims departments. with people that are specifically trained to speak with bereaved individuals. They make the process clear and offer other support services if these are available. These might include bereavement counselling as well as some immediate support with paying for funeral arrangements. This additional support can be invaluable and if it is not offered then you should ask about them.

What evidence is required for a life insurance claim?

Besides the details of the policy, a death certificate is required so that the insurance company can verify and understand the cause of death. It is wise to make certified copies of the death certificate as it may be needed for other enquiries. If you are unable to locate the life insurance policy documents, a bank statement may show you the direct debit payment details so that you can determine which insurance company to contact.

Every life insurance company has a defined claims process that will help to support the deceased person's next of kin, including providing guidance on the required evidence. It is worth noting that claims can be started by anyone - they do not have to be the policyholder's next of kin.

Are life insurance claims ever declined?

Yes, but it is quite rare. Across the market and amongst large insurance companies, we see between 1-7% of life insurance claims are declined. We explain the most common reasons for a declined life insurance claim below.

Why are some life insurance claims declined?

Life insurance claims that end up being declined usually fall into one or more of three areas. These are:

  • Misrepresentation
  • Policy Lapse
  • Cause of death excluded

Here, we have looked at each area and explained these reasons for a declined life insurance claim.

Misrepresentation when applying for the insurance

Dependent on the cause of death, an insurance company may wish to write to the deceased person's doctor. A report of the person's medical history is usually how a misrepresentation will come to light.

There are many examples of misrepresentation but broadly, if you haven't been honest in answering all the questions at the application stage then your life insurance policy may not pay out if you die.

Over the last few years, there has been a notable incidence of payouts refused for alcohol-related deaths. This is because the policyholder has misrepresented the amount of alcohol they consumed and/or they have not accurately disclosed details of medical advice they received to reduce their alcohol consumption. If death is then attributed to alcohol consumption, the claims assessor will look closely at this. Usually, the insurance company assesses whether the application would have been declined if this information had been disclosed correctly from the outset.

Often the assessor will consider whether the policyholder misrepresented the facts deliberately or whether this could have happened innocently. There are instances when a claim will be paid because the misrepresentation has been caused by an innocent error. In the absence of evidence to support an innocent error, the life insurance claim is likely to be declined for misrepresentation.

Policy premiums not maintained

If a person has fallen behind with payments, it is likely the life insurance policy will have lapsed and ceased to insure them. It is still worthwhile contacting the insurance company as all claims are considered and you should discuss the circumstances. The claim may still be declined but there are occasions when the premiums paid may be refunded.

Some over 50s or whole of life insurance policies will pay a claim even after payments have stopped being made. Some policies offer a 'paid up' status once enough premiums have been paid to warrant a full or partial payout.

Life insurance policies that are linked to an investment will usually maintain a value even if premiums have stopped being paid. The value will depend on the amount of premiums paid, the length of time that the policy was held for and the valuation of the associated investments. It is unlikely that the full death benefit will be claimable if premiums haven't been maintained for the pre-arranged period of time.

Death in circumstances that are excluded within the terms of the policy

Good quality life insurance policies do not carry many, if any, standard exclusions. The few that may appear will prevent a claim from being paid if the cause of death falls within the specific exclusions explained within the policy terms. Occasionally, insurance companies add exclusions to policies based on a policyholder's specific health, hobbies or occupation.

For example, a person who pursues a dangerous sport might receive an exclusion for death caused as a direct result of this sport. The exclusion is explained before the policy is started the policyholder will usually be asked to accept the non-standard offer in writing.

Examples of standard exclusions found in life insurance policies

Death caused by:

  • A criminal act
  • Suicide within the first year or two of the policy
  • Alcohol or drug abuse

There may be other specific exclusions which will always be detailed within the policy terms and conditions. Usually, you can find these under sections described as "When will we not pay a claim?".

Will life insurance always pay the full amount?

It is a common misunderstanding that all life insurance policies insure a set lump sum and this is what will pay out if a claim is successful. Life insurance policies are arranged for different purposes so the claim amount may not be what you expect. 

Family income benefit claims

This type of policy is arranged to pay an income from the point of claim until the policy end date. It is most commonly arranged to provide for dependents and family. If the policyholder bought a 20 year policy for example and died 10 years into the policy, there would be 10 years of income payable. However, if the same person died 19 years into the policy, it will pay out for only the remaining year.

Mortgage/Decreasing term insurance

This policy type is used predominantly to ensure that a repayment mortgage can be paid off if the policyholder dies within the mortgage term. Sometimes, people choose to insure part of the mortgage amount and so the amount of the payout at claim may not be the same as the amount that is outstanding on the mortgage. Even if the amount of the insurance and the mortgage were the same at the outset, the amount of insurance reduces in line with the mortgage balance. This means that the payout at claim will depend on how much the policy and mortgage balance have reduced.

Level term insurance

This type of insurance pays out a lump sum that remains the same throughout the term of the policy. This means that whether a claim is made within the first few years or the last few years, the payout will be the same.

Over 50s life insurance

There is usually a qualifying period at the outset of these policies. Usually, if death happens before the qualifying period has passed, the premiums paid for the policy or a multiple of this are paid out. Even after the qualifying period, certain policies have options to stop paying a premium on the understanding that the payout will be reduced for a claim.

Whole of life insurance

These policies are usually arranged for a defined lump sum of money and this is what will pay out if a claim is made. There is usually no qualifying period except in the case of some investment-linked policies.

Index-linked/Increasing policies

This is not a type of policy but an option that can be selected with some policy types. The option ensures that the amount of the insurance increases each year to keep track of inflation. For a policy that includes this option, you would expect the claim value to be more than the sum that was initially insured. If it was selected with a family income benefit policy, the increase may apply to the annual payout amounts until the policy term ends.

Critical illness insurance

Often, people buy a combination policy that protects them in the event of diagnosis of a serious illness alongside death. If the deceased person had made a claim for a serious illness diagnosis prior to death, the payout amount may be reduced by this amount. Some policies are arranged to payout in both events in which case, the amount of life insurance payout should remain the same regardless of a prior claim for a serious illness.

Who receives the payout from a life insurance claim?

Who receives the payout from a life insurance policy will depend on how the policy was set up. If the policy was arranged with a trust, the beneficiaries are much easier to determine. This would have been arranged around the same time that the policy was started. Read more about trusts in our article "Writing your life insurance in trust – How it works and why you should consider it".

Joint policy claims

Partners or spouses generally buy their life insurance on a joint basis. This means that the policy insures both their lives and pays out upon the first of them to die. In this instance, the insured amount is paid to the surviving person on the policy. If, in an awful circumstance, both policyholders have died, the recipient of the payout will be determined by the trust. If there is no trust arrangement then the claim amount will be paid to the deceased person's estate and follow the probate process.

Single life policy claims

Claims for life insurance policies that insure only one person are usually paid out through a trust to the beneficiaries nominated. If there was no trust arranged then the policy proceeds will be paid to the deceased person's estate and go through the normal channels of probate.

Life of another claims

Occasionally, policies are arranged on a 'Life of another' basis. This means that the person paying for the policy is not the person who is insured. In these cases, the policy owner or person paying for the policy will usually receive the payout from the death claim. An example of this would be partners who have separated or divorced and wish to protect themselves against loss of maintenance or alimony.

Single life policies in a shared plan claims

Some insurance companies offer life insurance plans where more than one policy can be arranged under one plan. If you have separate insurance policies but the costs are combined and paid as one, these policies are likely to be treated like a joint plan unless a trust has been arranged. If a trust was arranged then this will determine the beneficiaries. Otherwise, the surviving policyholder is likely to receive the payout.

What happens to a life insurance payout if nobody is nominated?

Life insurance payouts usually form part of a person's estate alongside their other assets, if a beneficiary hasn't been nominated. This isn't ideal for a number of reasons. The person who ends up receiving the payout may not be the person who the deceased wished to benefit. Also, the money could become liable for inheritance tax if the estate exceeds the allowance and the beneficiary is not a spouse.

There are some very important considerations when arranging a trust to ensure that benefits from your life insurance are distributed in the most efficient way. You can read more about trusts in this article "Writing your life insurance in trust – How it works and why you should consider it".

What can we conclude from understanding the payout rates from life insurance companies?

  1. Successful life insurance claim rates are high and often upwards of 95% of all claims received.
  2. Payout rates are not uniformly described by different insurance companies and this makes it difficult to make direct comparisons between them.
  3. Insurers that have a larger number of customers and have operated over a longer period of time will experience a larger number of claims and this usually has a positive effect on the payout rate.
  4. Conversely, insurance companies that have operated for a short time period will have seen less claims and this can skew the claims statistics.
  5. The press tends to cover stories where claims are declined because these are more interesting than those that are paid - bear this in mind.
  6. If you want to ensure that your life insurance will pay out and not be declined, complete your application form honestly. If you're not sure how to answer a question, make this known to the insurer - the onus is on them to find an appropriate solution.
  7. If you want to ensure that your life insurance benefits end up with your intended beneficiaries in full and without delay, arrange a trust.