Your guide to navigating an annuity or life insurance policy payout
Coping with the financial aspect of losing a loved one
Understanding your options for inherited money
An annuity is a long-term, tax-deferred contract issued by a life insurance company. It’s designed to turn the investment made in the contract into regular payments that can last a lifetime. This is called annuitization.
When your loved one purchased the annuity, they had the option to name one or more beneficiaries. And those beneficiaries are then eligible to receive payments when your loved one passes away.
Every situation is different, but 2 common ways that people receive annuity money are in a lump-sum payment or in incremental amounts during the first 5 years after the contract owner passes away.
Another payment option is to reinvest in an inherited annuity. For this type of payout, you can either:
1. Annuitize the proceeds to create a stream of income for a set period or for your lifetime.
- OR -
2. Use the proceeds to purchase a new deferred contract with either a 5- or 10-year payout option or for your lifetime.
These aren’t the only payment options available, though. Your financial services professional will be able to provide a more comprehensive list and can help you determine which option might be right for you.
When thinking about how to invest your inheritance, there are a variety of choices available. It’s important to think about what your needs are and what you want to achieve, including:
- Do you want to accumulate assets?
- Do you want to preserve wealth?
- Do you want to have guaranteed income?
Your answers to these questions will help your financial professional guide you to the option that’s right for you.
Inherited annuities are taxable as ordinary income in the year that you receive the payment(s). So, the amount and timing of the taxes you’ll owe depends on the type of payment you choose.
For example, if you choose to take a lump-sum payout, where you get the money all at once, you’ll typically have the largest tax liability.
On the other hand, reinvesting in an inherited annuity can help minimize the tax liability by spreading it out over time.
A death benefit is the money that you, as the beneficiary, receive from a life insurance policy when your loved one passes away. This money is usually income tax-free.
Life insurance policies enable your loved one to provide you with assets to help with things such as:
- Replacing lost income
- Covering college expenses
- Paying off a mortgage
- Covering funeral expenses or estate taxes
- And more
Every situation is different, but these are the most frequently used payment options:
- Taking a lump-sum payment
- Taking installment payments
- Placing the funds in an interest-earning account
- Investing in an annuity with one of the following:
- Annuitize the proceeds of the life insurance policy to create a stream of income for a set period or for your lifetime.
- Use the proceeds to purchase a deferred contract with either a 5- or 10-year payout option or for your lifetime.
Your financial services professional can provide a complete list of payment options and discuss which one might be right for you.
Generally, the life insurance proceeds you receive as a beneficiary are not included in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received.
Keep in mind that reinvesting in an annuity could also help minimize any tax liability you have by spreading it out over time.