Receiving proceeds from an annuity or life insurance policy

Beneficiary support

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Is taking a lump sum payout or reinvesting for lifetime income right for you? Will you owe taxes on the annuity payout?

Making financial decisions after the loss of a loved one can be stressful. But having a better understanding of your options, as well as some general terms and rules regarding inherited money, will help when you’re ready to talk to your financial services professional.

That’s why we’re sharing these commonly asked questions about inherited money.

The basics

An annuity is a long-term, tax-deferred contract issued by a life insurance company. It is designed to turn the investment made into the contract into regular payments that can last a lifetime. This is called annuitization.

When someone purchases an annuity, they may have the option to name one or more beneficiaries. And those beneficiaries are then eligible to receive payments when the original annuitant passes away.

Annuities are categorized as either qualified or nonqualified. This means they differ in how they are taxed and transferred to a beneficiary. Your financial services professional can tell you more about your specific annuity.

Payment options

Every situation is different, but two 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's death.

Another payment option is to reinvest in an inherited annuity. For this type of payout, you can either:

1. Annuitize the proceeds of the annuity 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 all of the available payment options. A financial services professional will be able to provide a more comprehensive list and can help you determine which option might be right for you.

Investment options

We offer a variety of options to suit your needs. It’s important to think about what your goals are and what you want to achieve.

    •  Do you want to accumulate assets?

    •  Do you want to preserve wealth?

    •  Do you want to have guaranteed income?

One of our experienced financial services professionals can help you understand all your options based on your financial needs and goals.


Taxes

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.

The basics

A death benefit is the money a beneficiary receives from a life insurance policy upon the death of the policyowner. This money is usually income tax-free.

Life insurance policies help provide security to the beneficiary and can help secure your family’s financial future by assisting with college expenses, paying off a mortgage, covering funeral expenses or estate taxes, and more.

Payment options

Every situation is different, but these are the most frequently used payment options:

  • A lump sum payment

  • Installment payments

  • Place funds in an interest-earning account

  • Invest in an annuity with one of the following

     1. Annuitize the proceeds of the life insurance policy to create a stream of income for a set period or for your lifetime.

     2. Use the proceeds to purchase a deferred contract with either a 5- or 10-year payout option or for your lifetime.

Contact your financial services professional for a complete list of payment options, and to discuss which option might be right for you.

Investment options

We offer a variety of options to help meet your needs. It’s important to think about what your goals are and what you want to achieve:

     • Do you want to accumulate assets?

     • Do you want to preserve wealth?

     • Do you want to have guaranteed income?

One of our experienced financial services professionals can help you understand all your options based on your future financial plans.

Taxes

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 help minimize the tax liability by spreading it out over time.

Unsure about what to do with your proceeds?

We're here to help. If you have additional questions, one of our financial services professionals would be happy to help you understand your options as a beneficiary.

We offer:

  • Personalized financial goal setting and attainment planning
  • Ongoing professional support with no rush or time restrictions to make decisions
  • No cost, fees or sales pitches

Let's discuss your investment options

Schedule a time to talk, or call us at 1-844-457-7982 weekdays 9 a.m. - 6 p.m. ET.

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Questions about a claim? Call our Solutions Center at 1-800-848-6331.

Please keep in mind that annuities have limitations. They are designed for long-term retirement goals. They are not meant to be used as emergency funds, as income for day-to-day expenses or to fund short-term savings goals. Before deciding on an annuity, you should consider your income needs, risk tolerance and investment objectives. Your investment professional can help you decide if annuities are a suitable investment and can help you pick a Nationwide® annuity. Federal tax laws are complex and subject to change. This information is based on current interpretations of the law. Nationwide doesn’t offer tax advice. Please talk with your attorney or tax advisor for answers to specific questions.

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