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, can help make the process a smooth one once you’re ready to talk to your financial services professional.
On top of working through the emotional part of losing a loved one, you may also be facing an ever-growing list of financial obligations. We’ve designed these takeaways to help relieve some of the burden you may be feeling.
There are details about the payouts from annuities and life insurance policies — including how they’re taxed and how you can receive payments — that you should consider before receiving your inheritance.
Our beneficiary support video guides you through the essential steps to take after the loss of a loved one. It helps you understand your life and annuity benefits, navigate the system, and find emotional support. Watch now to explore the steps you need to take to manage the process with confidence.
The following answers can help guide you through some of the most frequently asked questions.
For annuities
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:
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:
Every situation is different, but these are the most frequently used payment options:
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.
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 whether 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.