Haris Ashley
Life insurance payouts can be a substantial amount of money, and deciding what to do with the funds can be overwhelming. While the money is often intended to cover immediate costs, such as funeral expenses and medical bills, it is also meant to provide for long-term needs, including everyday living expenses and children's education. There are several options for how to receive and invest a life insurance payout, including lump-sum payments, annuities, and retained asset accounts. Each option has its own advantages and disadvantages, and the best choice depends on the beneficiary's individual needs and financial situation. Working with a financial professional can help beneficiaries make a plan that ensures the payout covers both current and future expenses.
| Characteristics | Values |
|---|---|
| Average payout amount | $168,000 |
| Payout type | Lump sum, annuity, retained asset account |
| Use cases | Funeral costs, bills, mortgage, college tuition, savings, investments |
| Tax implications | Tax-free lump sum, taxable interest income |
| Financial planning | Seek advice from a financial planner or advisor |
Lump sum vs annuity
When deciding how to invest a life insurance payout, there are two main options to consider: taking it as a lump sum or converting it into an annuity. Both options have their own advantages and disadvantages, and the best choice depends on your individual circumstances and financial goals.
With a lump-sum payout, you receive the entire amount of the insurance benefit at once. This can give you a sense of financial security and flexibility, as you have immediate access to a large sum of cash. You can use this money to pay off debts, cover immediate expenses, or invest it to potentially grow your wealth. However, managing a large sum of money can be overwhelming, and there is a risk of spending it too quickly or making unwise investment decisions.
On the other hand, with an annuity, you convert the insurance payout into a series of regular payments that are guaranteed for life. This option provides a steady income stream, which can be beneficial if you want to ensure a consistent cash flow during retirement. Annuities can be customised to your needs, with options to include a spouse or protect against longevity risk. However, annuities typically offer less flexibility than a lump sum, and you may incur penalties if you need to access a large sum of money suddenly.
If you are younger, in good health, and have a long investment horizon, a lump sum may be more attractive. You can invest the money for potential growth and have access to it for various life expenses, such as buying a home or starting a business. Additionally, if you are concerned about creating an inheritance for your heirs, a lump sum can provide more flexibility in how you allocate your wealth.
However, if you are retired or nearing retirement, an annuity may be more appealing. It provides a guaranteed income for life, eliminating the risk of outliving your assets or experiencing poor investment returns. Annuities can also offer peace of mind by ensuring that you have a steady income stream to cover your essential expenses.
When deciding between a lump sum and an annuity, it is essential to consider your financial goals, risk tolerance, and expected lifespan. Consulting with a financial professional can help you weigh the pros and cons of each option and make an informed decision that aligns with your unique circumstances.
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Funeral costs
Funerals are expensive, with the average cost reaching $8,000, so it's important to consider how to pay for them. Even if you have savings or an inheritance, this money may not be immediately available to your relatives, and most funeral homes require upfront payment. This is where life insurance can help.
Burial Insurance
Burial insurance is a type of life insurance designed to pay for funeral and end-of-life expenses. It is usually a whole life policy that lasts until you pass away and can be used to pay for burial or cremation services. It can also be used to pay off any outstanding debts, such as medical bills, mortgage loans, or credit card bills. Burial insurance is often more affordable than traditional life insurance due to its lower coverage amounts.
Pre-Need Insurance
Pre-need insurance is a type of burial insurance that involves a contract with your chosen funeral service provider. The policy's payout goes directly to the funeral home to cover specific products and services you've selected. This type of insurance usually has a waiting period during which your beneficiaries may receive a limited death benefit or no benefit at all.
Final Expense Insurance
Final expense insurance offers fixed premiums that don't change over time. The cash benefit can be used to cover funeral and burial costs, medical needs, or any other expenses. This type of insurance usually only requires a brief health questionnaire rather than a full medical exam.
Universal Life Insurance
Universal life insurance is another option for lifelong coverage that can be less expensive than whole life insurance. It can be used by your family for burial and other expenses. Not all universal life insurance policies will build much cash value, but you can choose investment sub-accounts for your cash value.
Variable Life Insurance
Variable life insurance is a permanent coverage option. With this type of policy, you choose investment sub-accounts for your cash value, which can include stocks, bonds, and mutual funds. There are two death benefit payout options: a level death benefit, which pays a set amount with the remainder going back to the insurance company, and a variable death benefit, which pays the face amount and the cash value but at a higher premium.
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Savings accounts
If you're looking for a place to invest your life insurance payout, a savings account can be a good option. Life insurance savings accounts, also known as cash value, are included in most permanent life insurance policies. They can be beneficial if you want to grow your wealth over time. When you pay the premium for a cash-value life insurance policy, a portion of it goes towards the insurance and associated fees, while the rest is invested in the policy's cash value. This cash value component can be a useful financial tool, not only in the event of the policyholder's death but also during their lifetime.
There are a few things to keep in mind when considering a life insurance savings account. Firstly, the cash value accrues at a fixed interest rate, which may be lower than what you could earn with a high-yield savings account or other investments. Additionally, any interest earned on the account will typically be taxable. However, permanent life insurance policies offer guaranteed financial protection and a tax-efficient way to build your net worth. They can complement your traditional retirement savings and investments by providing a death benefit and a tax-efficient cash value component.
It's important to note that term life insurance policies do not offer a cash value component and are not typically used to supplement savings. Permanent life insurance policies, on the other hand, enable you to invest in conservative investments and diversify your portfolio according to your risk tolerance and goals. Some permanent life insurance policies have fixed premiums that remain unchanged over the policy's lifetime, while others have flexible premiums that can change. By taking advantage of the cash value component, you can borrow against it to finance purchases or investments and repay the loan with interest.
When deciding whether to invest your life insurance payout in a savings account, it's essential to consider your financial situation, goals, and risk tolerance. Working with a financial planner can help you review your options and create a plan that ensures the payout meets your current and future needs. They can also help you navigate the different types of life insurance policies and their respective cash value and investment options. Ultimately, the decision to invest in a savings account should be based on your specific circumstances and financial objectives.
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Investing
If you are a life insurance beneficiary, you may be wondering what to do with the payout. The choice is yours, but it can be a large amount of money to receive all at once, and it can feel overwhelming. It's a good idea to seek advice from a financial planner to help you review your options and create a plan that will ensure the insurance payout covers your current and future needs.
Lump Sum
The lump-sum option is the most common type of life insurance payout. It may be a good choice for beneficiaries who need immediate access to funds to cover expenses and financial obligations, such as funeral costs, outstanding debts, or ongoing living expenses. However, this option can also be risky if the funds are not properly managed. If the payout exceeds a certain amount, it may be necessary to place the funds into multiple accounts.
Annuity
With an annuity, the insurance company acts like a savings account and generates interest. You will receive guaranteed payments for life, and it takes away the risk of losing money if you were to invest it in the stock market. However, annuities can be complicated, and you will pay taxes on any gains in interest. An annuity may be a good option for older people in retirement who may feel uncomfortable managing a large sum of money.
Savings Accounts
You could consider putting the money into a high-yield savings account, but there are potential issues with FDIC protection limits, and interest rates can be low.
Investments
You could consider investing the money to make it last a long time. This could include investing in stocks and bonds, but this comes with risk. You could also put the money into a LifeStrategy moderate fund, which is not as tax-efficient as separate funds but will still see you come out ahead in the long run.
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Financial advisors
Other financial advisors may include life insurance in their overall strategy, motivated by duty, profit, or both. Advisors who make a living through commissions have a strong financial incentive to include life insurance, as some insurance companies pay well for selling their products. Obtaining formal qualifications, such as becoming a Chartered Life Underwriter (CLU) or a Certified Insurance Counselor, can ensure that advisors are comfortable with every aspect of the product they are selling.
When it comes to investing a life insurance payout, a financial advisor can help you review your options and create a plan to ensure the payout covers your current and future needs. If you are younger, a lump sum payout option may be more appealing, as your needs for that money could change over time. On the other hand, if you are older and in retirement, an annuity option can provide a guaranteed income source and reduce the risk of losing money in the stock market.
It is important to note that a life insurance agent is not the same as a financial planner. A fee-only financial planner who does not sell insurance can provide unbiased advice and help you make optimal decisions regarding your life insurance and investments.
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Frequently asked questions
You can receive a life insurance payout as a lump sum, annuity, or retained asset account. A lump sum is a tax-free payment that gives beneficiaries immediate access to funds. An annuity is a lower-risk option where beneficiaries receive periodic payments, which can be monthly, quarterly, semi-annually, or annually. A retained asset account is a checking or money market account set up by the insurance company, where beneficiaries can access funds as needed.
A lump-sum payout is a good option for beneficiaries who need immediate access to funds to cover expenses and financial obligations, such as funeral costs, debts, or living expenses. However, this option can be risky if the funds are not properly managed, and a large payout may need to be placed in multiple accounts.
An annuity payout may be a better option for individuals concerned about managing a large sum of money all at once. It provides a guaranteed source of income and removes the risk of losing money in the stock market. However, annuities can be complicated, and you may receive a lower total payout compared to a lump sum. Additionally, any interest earned will be taxable.
A life insurance payout can cover immediate costs such as funeral expenses, medical bills, and outstanding debts. It can also help with longer-term costs, including everyday living expenses, children's education expenses, and retirement savings.
Receiving a large sum of money all at once can feel overwhelming, and it can be difficult to decide how to invest it on your own. Working with a financial planner or advisor can help you make sound financial decisions and create a personalized strategy that fits your current and future needs.
