Which life insurance payment structure is right for you?

If someone you love passes away and you’re the beneficiary of their life insurance policy, you have the peace of mind that your financial future is healthy while you grieve your loved one. But long-term, there may be some questions about how to manage this responsibility, for yourself and your family.

Once you take a deep breath and realize that your loved one put the policy in your name in order to ensure your well-being after they were gone, then you can decide how you want to receive it. 

Insurance companies typically offer four or five options to choose from when deciding how you want to receive the death benefit payouts. Although a lump-sum payout may seem appealing, if you don’t trust yourself to not spend it all quickly, then there are other payment options that you can spread out over time. Each has its own advantages, depending on what’s most important to you.

Which option you decide on is a personal choice to be made based on your age, your current income, and the amount you’re receiving from the policy. From there, you can figure out which life insurance payment structure is best for you.

Lump-sum fixed amount

A lump sum payout is just that: the entire amount at once. Upon the death of your loved one, if you choose this option, you will receive the whole amount. If the sum is quite considerable in size, you may need to spread it out over multiple accounts, because bank accounts are only covered by the FDIC up to $250,000.

Advantages: In choosing the lump sum option, you have complete control over the money the moment you get it, so you can use it as you want. Life insurance payments are also, generally, not considered taxable income, so you don’t have to worry about a tax issue befalling you. One caveat: Any interest you make off of these funds is taxable and should be reported on your tax return. However, in taking the full amount it’s up to you to spend it wisely and not blow through all of it in a short amount of time. Once it’s gone, it’s gone.

Retained asset account

In some cases, depending on the policy, you can leave the payout with the insurance company where it will be kept in an interest-bearing account, but not necessarily high-yielding.

Although you’ll have access to the money via a checkbook, it will stay in the account the insurance company set up. With this option, any interest made on the account is taxable.

Advantages: If your payout is very large, by leaving it in the account you can avoid concerning yourself with FDIC insurance limits, because the insurance company protects the entire payout when you leave it with them. You also don’t have to worry about possibly spending it all quickly.

Life income payout

Also called an annuity option, this payout will allow you receive regular payments over the course of your lifetime.

The amount of the regular payments is based on both the total amount of the death benefit and the age you are when you file the claim to retrieve the benefit—the younger you are, the smaller the payments so it will last the rest of your life.

If you should pass away before using all the money, the insurance company will keep what’s left.

Advantages: Setting up lifetime payments will prevent you from going through a lump sum of money. Also, should you live longer than the insurance company originally calculated when deciding on payment amounts, you could end up receiving more than the death benefit was when you initially filed the claim.

Life income with period certain

Similar to the life income payout option this, too, is guaranteed to last your entire life. The only difference between these two options is that with this one, should you pass away, the payments will continue for a certain period of time—hence the name.

What this means is that if you choose the life income with a 20-year period certain, then if you pass away 10 years after initially receiving the death benefit, your chosen beneficiaries will receive payments for the next 10 years.

Advantages: If you do happen to pass away within that agreed upon amount of time, your beneficiaries will continue to receive payments for that allotted period, instead of the insurance company keeping what’s left.

Specific income payout

With this payout, you’ll receive the death benefits in installments of which you decide the amount of the payments and when you’ll receive those payments. So if the death benefit is $100,000, you can choose a specific income payout that guarantees you $20,000 every year for five years—or whatever amount and time frame is best for you.

Advantages: Unlike the life income payout, you get to decide how much each installment will be and when you’ll receive it. It also provides protection from spending it all at once, if you had chosen the lump sum option.

When deciding which payout option is best for you, it’s important to remember that your loved one made you the beneficiary of the policy because they wanted that money to make your life easier.

While what you do with the benefit is your business, taking into consideration why you were chosen to receive this money and how your loved one hoped you would use it, will help guide you in both accepting the money without guilt and being responsible in your payment structure choice.

You may be eligible for free bereavement support. Empathy can help with everything from funeral planning to estate administration, with step-by-step guidance and real-time expert support. Many people get free premium access to Empathy as a benefit with their life insurance claim. We partner with New York Life, Guardian Life Insurance Company, Bestow, Lemonade, and other leading carriers. When you make your life insurance claim, talk to your representative about whether Empathy is a benefit they offer.