A lump sum payment is not the only option when you are due a death benefit from life insurance. There are three ways you can take your benefit. Each has its pros and cons.
Life insurance is often used to provide immediate funds for a spouse or family member who has died. As a financial advisor who works with families that have lost a loved ones, I know firsthand how insurance policies can impact the survivors. The family can continue to live and support their family with a life insurance death benefit. It provides immediate funds that pay bills and may even be used as a source of funding for future college expenses. The impact can be huge in any way.
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The first thing is the most important
You will need to contact your life insurance company if you are the beneficiary of a death benefit from life insurance. You can use my Survivor’s Checklist to help you get organized. Most insurance companies pay benefits within 30-60 calendar days from the date of a claim. The insurance company might delay investigating a claim if the insured dies within two years after taking out the policy. This is known as the “contestability clause.”
- Lump sum
The default option for most carriers is the lump-sum payout. This is a very popular choice. The proceeds can be sent to you by check or directly into your bank account. You can take a lump sum to cover your mortgage payment, other bills, cash cushion, or invest in a brokerage account. The money is yours to control.
- Annuity
An annuity is an option if you don’t want to run out of money, or you prefer the security of a steady income stream monthly. Annuity payouts can be estimated by insurance companies. An annuity has its downsides. The income might not be sufficient, or the income could stop upon your death. You may also need cash to pay the mortgage or for college.
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- Installment payments
You can also keep the life insurance death benefit and have installment payments made to you. The insurance company will hold the money in interest-bearing accounts and send you checks according to a schedule that you choose. You could request $5,000 per month. The insurance company will continue sending you installment payments until your account is exhausted. This is different from an annuity because an insurance company can guarantee annuity income throughout your life. However, installment payments expire when the principal balance is exhausted.
- A plan is essential
Your needs and your personality will determine which option is best. Annuity strategies may be a better option if you’re worried about running out. A lump sum is a good option if you are looking to pay off your mortgage and put the rest towards college or retirement. You can also choose to take a combination of all three. It is not uncommon for widowers to take a lump sum and buy an annuity to meet their day-to-day income requirements.
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- A plan is essential
Your needs and your personality will determine which option is best. Annuity strategies may be a better option if you’re worried about running out. A lump sum is a good option if you are looking to pay off your mortgage and put the rest towards college or retirement. You can also choose to take a combination of all three. It is not uncommon for widowers to take a lump sum and buy an annuity to meet their day-to-day income requirements.
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It all depends on your circumstances. A financial plan such as my Survivor’s Financial Plan can help you evaluate the options and make the right decision.