How do life insurance proceeds pass to a named beneficiary after death?

Life insurance proceeds pass directly to a named beneficiary outside of the probate process, meaning they do not typically pass through a will. Upon the death of the insured, the beneficiary can choose from several settlement options provided by the insurer:1

• Lump sum: The beneficiary receives the full face amount of the policy at once.1
• Installments: Proceeds can be paid out over a set number of years or in fixed periodic amounts until the funds are exhausted.1
• Interest-only: The money may be left with the insurer temporarily, allowing the beneficiary to draw interest on the balance.1
• Annuity: The proceeds can be used to purchase a life annuity, which provides guaranteed regular payments for the remainder of the beneficiary's life.1

Generally, these death benefits are exempt from federal income tax, providing a direct and often tax-advantaged transfer of assets to the designated individual.2