Will You Take that Lump Sum With or Without Tax?

Life Insurance death benefit optionsInsurance settlement options refer to the manner in which life insurance policy proceeds are paid out to the named beneficiary (or beneficiaries) following a claim. There are a number of different options available, the most common of which is a lump sum payout. This occurs when the beneficiary receives the entire amount of the death benefit – also known as the policy’s face amount – in one single lump sum.

Oftentimes, the beneficiary will need a large amount of funds quickly for the purpose of paying final expenses such as the funeral and burial of the decedent, as well as other intended purposes of the funds such as a mortgage payoff, future college education costs, or replacement of the decedent’s income. When these proceeds are received, they are typically free of federal income taxation to the beneficiary.

We know that life insurance can be a tricky subject. That’s why we are here to help. It’s our mission to ensure that you’ve got the proper insurance coverage. If someone that you love has recently passed away, and you’re the beneficiary, you’re going to be facing a lot of difficult decisions. Death brings plenty of emotional and financial struggles.

Taxation and Inheritance Proceeds

Just as in life, Uncle Sam will want to take his share following one’s death. While the circumstances and the amounts can vary a great deal, in most cases, people can be hit with inheritance and estate tax, as well as final income tax, upon passing.

Inheritance tax occurs after an individual has received a payout from a decedent. It is a tax on the amount that has been received, and it is required to be paid by the recipient. This type of tax is levied by one’s individual state. Therefore, in many instances, an estate can actually be taxed twice – once by the federal estate tax, and then again by the state inheritance tax.

The good news regarding life insurance proceeds is that even though they are oftentimes included in a decedent’s estate (although they can be removed by initiating some careful estate planning strategies), these funds are generally not inclusive for federal income tax purposes of the recipient. So, depending on the amount of the proceeds, this alone can save a substantial amount of inherited funds.

Other Life Insurance Settlement Options

In addition to receiving life insurance proceeds as a lump sum, there are typically other options that are available to the beneficiary. These may include:

  • Interest Income Option – With this option, the insurance company will retain the funds and pay out just a small amount of interest to the beneficiary on a regular basis.

  • Fixed Period Option –  The fixed period option pays the beneficiary both principal and interest over a fixed period of time. If the primary beneficiary passes away prior to receiving the entire amount of the proceeds, the remaining amount of funds will be sent to the policy’s contingent beneficiary.

  • Fixed Amount Option – The fixed amount settlement option will pay the proceeds to the beneficiary in a fixed amount over time until both the principal and the interest earned are fully paid out. This option can also be set up to that the payments can increase or decrease for a specific time frame, for instance, if the beneficiary needs funds to pay off a debt. This option is also referred to as the installment amount option.

  • Life Income Option – The life income option is similar to an annuity. With this option, the beneficiary is guaranteed an income for life. Therefore, the amount of income that is received by the beneficiary will depend upon the amount of the death benefit, as well as the beneficiary’s age and gender. The beneficiary may choose between a life income for a certain period of time such as 10 or 15 years, or a life income throughout the remainder of his or her life – regardless of how long that may be.

  • Specific Income Option – With the specific income option, the policy beneficiary can receive an equal amount of income each year for a set number of years until the total amount of death benefit proceeds has been paid out. The beneficiary may choose another individual to receive the remainder of the funds should he or she pass away before all of the proceeds have been received.

  • Joint and Survivor Option – With the joint and survivor option, the beneficiary is allowed to annuitize the payment based on the lives of two income recipients. Therefore, the payments are based on the amount of the death benefit proceeds plus the life expectancy of the beneficiary who is expected to live the longest. Income payments will continue until the last recipient passes away.

Getting Affordable Life Insurance Protection

Life insurance is one of the most important investments that you could ever make for your loved ones. It’s one of the few ways that you can ensure that your family. While the importance of life insurance is obvious, there are still millions of Americans that don’t have life insurance coverage. Not having life insurance coverage is one of the worst mistakes that you could ever possibly make for your loved ones. One of the most common reasons that people don’t buy life insurance is because they assume that it’s going to be too expensive.

There are several ways that you can get affordable life insurance protection, regardless of which kind of plan that you purchase. We know that nobody wants to think about his or her death, but it’s vital that your family has the money that they need, if something tragic were to happen to you.

One way that you can save money is to cut out any tobacco that you currently use. If you’re a smoker, you have a higher chance of being diagnosed with health complications like a heart attack or lung cancer. Both of these are going to mean that you’re a higher risk to the insurance company. They are going to offset that additional risk by charging you drastically higher rates. In fact, smokers are going to pay twice as much for their life insurance versus what a non-smoker is going to pay for the same sized plan. If you quit smoking, you’re going to save thousands and thousands of dollars every year.

Another way to save money is to improve your overall health. Just about any type of life insurance policy that you buy is going to require that you take a medical exam. The results of the medical exam are going to play a huge role in how much you pay every month. If you want to save money, you need to get better results. The two best ways to do that are to get regular exercise and stick to a healthy diet. Both of these can help you lose weight, lower your blood pressure, and much more.

The best way to ensure that you’re getting the best rates is to compare dozens and dozens of quotes before you decide which one is best for you. Every insurance company is different, and all of them are going to give you drastically different rates depending on which company that you contact. Finding the perfect company for your needs is the difference in getting an affordable plan or getting one that is going to break your bank every month.

There are hundreds of companies on the market, and all of them are going to offer you different quotes. Instead of wasting hours and hours calling different companies, let one of our agents do all of that hard work for you. We are a group of independent insurance agents, which means that we work with dozens and dozens of highly rated companies across the nation. We have years of experience working with all types of clients and companies.

If you have any questions about life insurance or about getting the payout from a plan, please contact one of our agents today. We would love to answer those questions and ensure that you’re getting the best plan possible.

Call us today for a quote at 1-888-552-6159.

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Doug Mitchell

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