Recent Death of Father and Looking At Life Insurance Payout Options

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jt123
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Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Hello, my father has passed away recently and we are trying to compare the life insurance payout options offered by the insurance company for my mother to help her make an informed decision on his life insurance. I am needing some help comparing the options. Option 1: a lump sum payment of $84,000. Option 2: Life Income (no certain period) $645 per month. Option 3 Life Income (20 years certain) $475.00 per month and Option 4 Life Income 10 years certain $591.00. My mother is 77 years old. I am wondering what interest rate this would be under the options and how would this compare to bond/cd rates. I do not understand these options that well yet. Has anyone had experience with the annuity type payout payments and are they paid out regularly. She does not need the income currently and would probably put it into bonds/money market at this point to diversify her investment portfolio. Thank you and any suggestions welcome.
123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by 123 »

Take a single lump sum payment. Do not become entangled in other products the insurance company is trying to sell you with the various options they are offering. If you really want them later they will be available.
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bluebolt
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by bluebolt »

If she's financially responsible and sound, I would take the lump sum.
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ResearchMed
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by ResearchMed »

jt123 wrote: Wed Mar 06, 2019 4:55 pm Hello, my father has passed away recently and we are trying to compare the life insurance payout options offered by the insurance company for my mother to help her make an informed decision on his life insurance. I am needing some help comparing the options. Option 1: a lump sum payment of $84,000. Option 2: Life Income (no certain period) $645 per month. Option 3 Life Income (20 years certain) $475.00 per month and Option 4 Life Income 10 years certain $591.00. My mother is 77 years old. I am wondering what interest rate this would be under the options and how would this compare to bond/cd rates. I do not understand these options that well yet. Has anyone had experience with the annuity type payout payments and are they paid out regularly. She does not need the income currently and would probably put it into bonds/money market at this point to diversify her investment portfolio. Thank you and any suggestions welcome.
Using immediateannuities.com , I plugged in the lump sum and age/sex above, and it shows a lifetime annuity of $654/month.
That is, the insurer isn't offering anything special in lieu of the lump so. That is, she could probably do as well, or very slightly better, on her own. (The figure I gave guessed at a state.)

Especially if your mother does NOT need "lifetime monthly income", then yes, have her take the lump sum, and help her invest it in a way that works for her.

RM
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by Grt2bOutdoors »

jt123 wrote: Wed Mar 06, 2019 4:55 pm Hello, my father has passed away recently and we are trying to compare the life insurance payout options offered by the insurance company for my mother to help her make an informed decision on his life insurance. I am needing some help comparing the options. Option 1: a lump sum payment of $84,000. Option 2: Life Income (no certain period) $645 per month. Option 3 Life Income (20 years certain) $475.00 per month and Option 4 Life Income 10 years certain $591.00. My mother is 77 years old. I am wondering what interest rate this would be under the options and how would this compare to bond/cd rates. I do not understand these options that well yet. Has anyone had experience with the annuity type payout payments and are they paid out regularly. She does not need the income currently and would probably put it into bonds/money market at this point to diversify her investment portfolio. Thank you and any suggestions welcome.
Sorry for your loss.

When an insurance company is offering a single premium immediate annuity (SPIA) as you indicate above, they are offering it at an implicit interest rate that also includes what is known as mortality benefits. Since your mother is of an advanced age, the insurance company actuaries have figured out the statistical likelihood of all of its annuitants living into the future, based on that analysis and the rates of return they expect to earn on the premium is how they calculate how much they can offer your mother with certainty. As suggested in the other two posts, if your mother is not in immediate need of income, take the lump sum and invest it as she is comfortable with - it could be in FDIC insured certificates of deposit. In the event, she does need an immediate income stream she could consider purchasing an SPIA then. For now, I'd take the lump sum and not tell any financial advisor/banker about it (nothing attracts the flies faster than the thought of free money).
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Hi,
Thank you for your response. There is some real insight there. I guess I was wondering if she were to live to 90 or 100 what percent interest would that equal over time. Is there any advantage to taking it or is it taxed exactly the same if she were to get an annuity later? There is not a need for income now, but I do like the thought of lifetime income for her.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by sergeant »

There is no tax on life insurance proceeds.
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NotWhoYouThink
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by NotWhoYouThink »

What income does she have now? Social security, pension? What does she need?

If she had little or no income an annuity might make senses, you can do your own research and decide whether to take what the insurance company is offering or go someplace else.

If she has enough income to pay her expenses for now and the near future I'd take the lump sum.
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

She lives on social security, that and a small pension cover her expenses. She has her home paid off. She has about $200K in Roth and 200 K in traditional and $100K in taxable. She rarely taps her investments and re-invests most of her RMDs. Currently at high stock to bond ratio which we need to adjust. So there is not a need for income now.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by Thorsbane »

sergeant wrote: Thu Mar 07, 2019 12:07 pm There is no tax on life insurance proceeds.
Assuming his father paid for the life insurance policy premiums rather than an employer paying for them.
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Hi,
Yes, good point. I think my dad paid for the insurance on his own. I understand that there are no taxes on insurance proceeds, as it is now we can choose the annuity-like option from the life insurance company, as a payout on the insurance. Is that taxed differently than if you were to take the money as a lump sum, then buy a new annuity with the money, at that point, it is not an insurance payout as that would happen at the lump sum? Then as you do the annuity after the lump sum is that taxed differently than the one by way of the insurance as the way of the payout.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by tbone555 »

I think in both cases you are only taxed on the earnings. Someone else will confirm what part of the payout is principle vs earnings. Are payouts taken from only principle until the principle is used up, and then all future payments count as earnings?
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by Stinky »

ResearchMed wrote: Wed Mar 06, 2019 9:53 pm
jt123 wrote: Wed Mar 06, 2019 4:55 pm
That is, the insurer isn't offering anything special in lieu of the lump so. That is, she could probably do as well, or very slightly better, on her own.

Especially if your mother does NOT need "lifetime monthly income", then yes, have her take the lump sum, and help her invest it in a way that works for her.

RM
+1

The insurer isn’t offering a “special” rate for annuitizing the life insurance proceeds. So, take the lump sum.

Then, you and your mother have a separate decision as to whether she would prefer having the security of a monthly annuity payout. But that’s a separate conversation.
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Watty
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by Watty »

jt123 wrote: Thu Mar 07, 2019 12:39 pm So there is not a need for income now.
That makes the lump sum choice easy.

If she needs the income later then buying a single premium immediate annunity(SPIA) would be a reasonable option to consider then.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by RickBoglehead »

There is no tax on the payout of a life insurance policy. There is zero reason to take anything other than the lump sum. The insurance company will try to confuse you - don't listen to them, take the lump sum.

We had this decision on a much smaller value policy 18 months ago. They gave us multiple options, but the lump sum was the best. When we pushed, we got, you're right, the lump sum option is better than this option...
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Hello everyone,
Thank you all for your posts. That really makes me understand this well. So a lump-sum it is.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by DIFAR31 »

sergeant wrote: Thu Mar 07, 2019 12:07 pm There is no tax on life insurance proceeds.
If you choose to annuitize the death benefit there can be. OP said that one of the available options is monthly life payments of $475 for 20 years certain. That's a minimum of $114k in total payments (more if the beneficiary lives longer than the certain period), on a base death benefit of $84,000. In this case, each monthly payment would probably be designated as part non-taxable death benefit and part interest which would be taxable as ordinary income.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by RickBoglehead »

DIFAR31 wrote: Thu Mar 07, 2019 4:41 pm
sergeant wrote: Thu Mar 07, 2019 12:07 pm There is no tax on life insurance proceeds.
If you choose to annuitize the death benefit there can be. OP said that one of the available options is monthly life payments of $475 for 20 years certain. That's a minimum of $114k in total payments (more if the beneficiary lives longer than the certain period), on a base death benefit of $84,000. In this case, each monthly payment would probably be designated as part non-taxable death benefit and part interest which would be taxable as ordinary income.
The payout is $84,000, untaxed. The annuity is a separate transaction, no matter how the insurance company tries to spin it.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by DIFAR31 »

RickBoglehead wrote: Thu Mar 07, 2019 4:44 pm
DIFAR31 wrote: Thu Mar 07, 2019 4:41 pm
sergeant wrote: Thu Mar 07, 2019 12:07 pm There is no tax on life insurance proceeds.
If you choose to annuitize the death benefit there can be. OP said that one of the available options is monthly life payments of $475 for 20 years certain. That's a minimum of $114k in total payments (more if the beneficiary lives longer than the certain period), on a base death benefit of $84,000. In this case, each monthly payment would probably be designated as part non-taxable death benefit and part interest which would be taxable as ordinary income.
The payout is $84,000, untaxed. The annuity is a separate transaction, no matter how the insurance company tries to spin it.
I'm basing my observation on personal experience. A daughter was a beneficiary of a family friend's life insurance policy. The insured person died. One of the payment options under the policy was to take monthly payments for a certain number of years at a specified interest rate. The total of the monthly payments was obviously more than the available lump-sum payment. Monthly payments over a five year period was the chosen option, and each year in which payments were made the insurance company provided a 1099-R showing the annual gross distribution in box 1 and the smaller taxable amount in box 2a. The distribution code in box 7 was 4D.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Thanks, Difar,
That personal experience is really helpul thanks for sharing that.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by DIFAR31 »

jt123 wrote: Thu Mar 07, 2019 5:08 pm Thanks, Difar,
That personal experience is really helpul thanks for sharing that.
You are welcome, and my condolences on your loss.

The best piece of advice I can give you, if you haven't already done this, is to get a copy of the actual policy as it was written to be sure you know what the payment options really are and what the payments are based on. This was a vexing problem for me (my daughter was a minor at the time, so I was acting as her conservator), as the life insurance representatives were clueless when I asked questions about payment options and formulas. When I finally got a copy of the actual policy (which is, after all, a contact), I was able to see exactly what the choices were and how payment amounts were calculated. From that point on it was just a matter of crunching numbers and considering my daughter's future needs (college) to figure out which option made the most sense.
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by ResearchMed »

DIFAR31 wrote: Thu Mar 07, 2019 5:00 pm
RickBoglehead wrote: Thu Mar 07, 2019 4:44 pm
DIFAR31 wrote: Thu Mar 07, 2019 4:41 pm
sergeant wrote: Thu Mar 07, 2019 12:07 pm There is no tax on life insurance proceeds.
If you choose to annuitize the death benefit there can be. OP said that one of the available options is monthly life payments of $475 for 20 years certain. That's a minimum of $114k in total payments (more if the beneficiary lives longer than the certain period), on a base death benefit of $84,000. In this case, each monthly payment would probably be designated as part non-taxable death benefit and part interest which would be taxable as ordinary income.
The payout is $84,000, untaxed. The annuity is a separate transaction, no matter how the insurance company tries to spin it.
I'm basing my observation on personal experience. A daughter was a beneficiary of a family friend's life insurance policy. The insured person died. One of the payment options under the policy was to take monthly payments for a certain number of years at a specified interest rate. The total of the monthly payments was obviously more than the available lump-sum payment. Monthly payments over a five year period was the chosen option, and each year in which payments were made the insurance company provided a 1099-R showing the annual gross distribution in box 1 and the smaller taxable amount in box 2a. The distribution code in box 7 was 4D.
I think your situation of someone taking monthly payments in lieu of a lump sum payment is different in terms of taxes, from taking the lump sum, only.

THEN, OP/family may use some or all of it, now or later, to get a life annuity.

(Also, your example was *with* a period certain, though not sure which one. It's not clear that OP/family would want that, vs. a simple SPIA/life annuity. In that case, there is no "minimum of total payments".)

RM
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DIFAR31
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by DIFAR31 »

ResearchMed wrote: Thu Mar 07, 2019 5:17 pm I think your situation of someone taking monthly payments in lieu of a lump sum payment is different in terms of taxes, from taking the lump sum, only.
Yes, of course. I'm not saying that a lump-sum death benefit is taxable.

THEN, OP/family may use some or all of it, now or later, to get a life annuity.
Understood. I took OP's situation to be the same as what my daughter faced: the life insurance company offered several different payout options, including annuitizing the death benefit, in addition to a simple lump-sum payout.
(Also, your example was *with* a period certain, though not sure which one. It's not clear that OP/family would want that, vs. a simple SPIA/life annuity. In that case, there is no "minimum of total payments".)

RM
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by retired_tom »

One thing you may want to check on the lump sum payout.
When my Dad passed away in 2009, I was the beneficiary of his life insurance policy. The ins. co. gave me all the payout options and I chose the lump sum. I was pleasantly surprised to find that they sent me a checkbook with the instructions that I could write any amount of checks, but the minimum check I could write was for $250, all the way up to the maximum of the death benefit. What I didn't realize until I got all the paperwork from the ins. co. was that any money in the account would earn 3% APY. Needless to say, I haven't written a check against that account yet, and happily watch the balance grow monthly. This, during a time when interest rates were lucky to hit 1%.
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Hi, retired Tom,
Good point as well, I will give my mom that information too. 3% currently. Can be .05 to 3.5% it states. I think these different options allow her to make a more informed decision.
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jt123
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Re: Recent Death of Father and Looking At Life Insurance Payout Options

Post by jt123 »

Interesting, I found an original policy it is dated 1963. Option 1 Equal installments for not more than 25 years at an interest rate of 3% 1 year 84.47 per 1000, 10 years 9.61, 15 years 6.87, 25 years 4.71, Option 2 kind of life income 10 year certain at age 77 female is $7.72 per 1000. Installment refund 7.42 per $1000. Option 3 Interest payments at 2 1/2% per year. Fixed amount at 3% with dividends was a $5000 original policy in 1963. It is one of 3 policies, so I should request the others.
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