What Type of Life Insurance Annuity Is Right for Your Family?

Did you know that when it comes to life insurance benefits, beneficiaries of a policy have options for how they get their money paid out? You can choose to have benefits paid out in one lump sum, but if you’d prefer to receive your money over a longer period of time, an annuity might be the best option. Annuities are long-term investments that allow your money to grow over time, so that you will get guaranteed income for life; if you decide to go with this option, you should know that there are different annuities to choose from. 

How Life Insurance Annuities Work

bag of money in black with a white money symbol in the middle
Beneficiaries can choose one lump sum, or an annuity on life insurance payments.

When a life insurance policy holder passes away, the beneficiary to the policy will generally receive their payout in one lump sum, but they also have the option to receive it as a life insurance annuity. Not to be confused with a life annuity, which is a standalone investment to supplement your retirement income, a life insurance annuity is only for beneficiaries of a life insurance policy; if you or your beneficiary chooses to receive benefits over an agreed-upon number of years, your life insurance company will convert the payout into an annuity, in a process called annuitization. The good thing about choosing an annuity is that the money that remains in the annuity will earn a fixed rate of interest determined by the insurer. 

Types of Life Insurance Annuities

If you or your beneficiary chooses to invest your death benefit in a life insurance annuity, you will have various options, including:

  1. Fixed-period annuity– Your money will be paid out over a period of 10, 15, or 20 years, and will grow tax-deferred at a fixed interest rate. If the beneficiary dies during this time, his or her beneficiary will receive the remaining payments until the fixed number of years expires.
  2. Variable annuity– This kind of annuity can be a little risky, because it involves investing in the stock market, meaning the amount of money paid out will be determined by how well the investment is doing.
  3. Lifetime annuity– Also known as life income annuity, with this type of annuity, the beneficiary will receive a percentage of the death benefit plus interest every year until they die.
  4. Lifetime annuity with period certain– With this annuity, your insurance company pays out income for the beneficiary’s entire life or the period certain, whichever is longer. If the beneficiary dies within the time, a designated beneficiary will receive the remaining payments for the remainder of the period.

Younger beneficiaries will benefit most from lifetime annuities since there is a longer payout period, meaning there is a longer time for interest to grow. Older beneficiaries might prefer a fixed-period annuity so they do not risk passing away before receiving the full amount.

Tax & Interest On Annuity Paymentscalculator next to a piece of paper and pens

If you take a death benefit as one lump sum, you will not need to pay taxes on it, but if you or your beneficiary chooses an annuity payment, part of the income will be taxed. This is because the money that is left with the insurance company will earn interest each year, and that interest is taxable. 

When it comes to life insurance payouts, you have options, and it’s important to go over these options so you can decide when the time comes. And if you’re still shopping around for a life insurance policy, remember that there are multiple policies to choose from, so make sure you compare different policies from multiple life insurance companies, since all of them have different ratings, coverage options, and pricing. The best way to find the right life insurance policy for you and your specific needs is by working with an agent who specializes in life insurance. We have provided the top life insurance companies in the nation below; each offers hassle-free assistance and the most competitive rates. Always check multiple sites to make sure you have bargaining power and know the advantages of each company. Make sure a hard time isn’t made harder by a financial burden, check life insurance rates today.

About The Author:
Cassandra Love

With over a decade of helpful content experience Cassandra has dedicated her career to making sure people have access to relevant, easy to understand, and valuable information. After realizing a huge knowledge gap Cassandra spent years researching and working with health insurance companies to create accessible guides and articles to walk anyone through every aspect of the insurance process.

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