There are several options when it comes to life insurance payouts. It’s important to understand those options so that you choose the right one for your situation.
Do you want a lump sum payout?
- By accepting the entire death benefit at once, it’s generally not counted as taxable income (only in rare cases would an estate tax come into play).
- Taking a lump sum can offer the most flexibility. You have complete control over the money and can use it how you want.
- It’s important to note that FDIC deposit insurance will only cover $250,000 per depositor so you may need to put your payout in multiple accounts.
Do you have an option for a retained asset account?
- This is a simple solution with easy access to the money. By leaving the payout with the insurance company, you might earn interest, but only on the death benefit amount.
- The insurance company will protect the money versus worrying about FDIC insurance limits.
- The interest you earn might be at a low rate, and it’s subject to taxation.
Can you convert your payout to an annuity?
- You could get more than the policy’s death benefit amount if you live longer than the insurance company expected when calculating your guaranteed payments.
- The younger you are, the smaller the payout amounts will be because they need to be distributed over an extended period of time.
- It’s possible that if you die before you collect the full life insurance benefit, the insurance company will keep what’s left.
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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Death benefit payouts are based upon the claims-paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.
Adapted From: https://www.forbes.com/advisor/life-insurance/payout-options/