Life Insurance Settlement Options
Navy Mutual offers a variety of settlement options when it comes time to disburse the death benefit of an insurance policy. The policy owner may designate which settlement option they would like their beneficiary to receive prior to the death of the insured. If there is no designated settlement option at the time of the insured’s death, the beneficiaries of the life insurance policy may choose how they would like to receive the death benefit.
- Lump Sum: The beneficiary will receive the full amount of the death benefit at one time.
- Fixed Period: The death benefit can be received as an annuity over a fixed period of one to 30 years. If the annuitant should die during the fixed period, the remaining principal will be paid in full or payments will continue for the remainder of the fixed period to their beneficiary.
- Fixed Amount: The death benefit will be paid in equal amounts every month until the entire amount of the proceeds has been paid. If the annuitant should die during the fixed-amount payment period, the remaining principal will be paid in full or payments will continue to their beneficiary until the full amount is paid.
- Interest Only: Interest payments are paid by the life insurance company on the amount of the proceeds retained. The death benefit remains available for full or partial withdrawals at any time or may be converted to an annuity payout option. Interest payments continue until the option is surrendered or converted to another option.
- Life Income: The death benefit will be paid for the life of the beneficiary. The annuitant may elect an option with the life income annuity, known as a guaranteed period certain, which ensures that payments will be paid to a second beneficiary if death of the annuitant should occur within a certain number of years after the purchase of the annuity. The years which may be elected under the guaranteed period certain option are typically five, 10, 15, or 20 years. Should the annuitant pass away during the guaranteed period certain, payments will continue to the new designated beneficiary for the remainder of the period certain.
If there are multiple beneficiaries, the policy will state how much of the death benefit each person should receive – either a monetary amount or a percentage. If there is only one beneficiary, the full amount of the death benefit will go solely to the listed individual. Note that a death benefit is typically paid out tax-free, but any interest earned does count as taxable income.
Annuity Settlement Options
Some annuities do not allow for payments to be made to a beneficiary after the death of the original annuitant so as to maximize payments to the annuitant while they are alive.
However, some annuities are set up in such a way that a beneficiary can receive income from the annuity after the original annuitant passes away. If you are the beneficiary of a Navy Mutual annuity, you have multiple options after the death of an annuitant.
- Annuity Continuation: If the spouse of the original annuitant was listed as the annuity’s beneficiary, they can change the name on the annuity to their own and continue the terms of the original annuity after the original annuitant’s death. This means that they will collect all remaining payments as scheduled and can select a new beneficiary in the case of their death. The annuity will maintain its tax-deferred status and no income tax will be immediately owed.
- Lump Sum: The beneficiary will receive the full amount of the annuity’s remaining cash value as a single payment. The beneficiary will be required to pay taxes on any difference between what was originally paid for the annuity and the amount of the death benefit during the tax year in which they receive the funds.
- Annuitization: The beneficiary can annuitize their receipt of the original annuity’s death benefit and create an income stream for the remainder of their own life. This allows the beneficiary to spread the tax liability out over the remainder of their life, leading to the lowest tax payments each year.
- Five-Year Holding: Beneficiaries can withdraw incremental amounts from an annuity for a five-year period provided that the entire value of the annuity is withdrawn by the end of the fifth year. This allows beneficiaries to spread their tax liability out over five years.
Anyone who receives money from an annuity will owe taxes on any growth in the annuity’s value upon receipt of payments. For example, if the owner of the annuity originally paid $100,000 for the annuity and earned $25,000 by the time of their passing, the beneficiary of the policy would owe taxes on $25,000. The timing of tax payments depends on when the beneficiary withdraws money from the annuity.
How to Utilize Death Settlement Funds
As the beneficiary of a life insurance policy or an annuity, you will likely have full discretion over how to use the funds you receive from the death benefit. If you know that you are a loved one’s beneficiary, have a conversation with them while they are still alive and ask about their wishes for the money. This can help provide guidance after they are gone.
It may help to set the money aside for the duration of your grieving so that when it does come time to determine how to spend, save, or invest the settlement, you have a better idea of what needs must be met. Financial counseling can help you best determine how to appropriate the funds.
There are resources available to individuals who desire financial counseling. Members of the military and their families have free access to financial counseling on military installations through Personal Financial Management Programs at family support centers; they also can meet with financial counselors through Military OneSource. Outside of the military, you may also be able to access financial counseling through your bank or credit union, your employer, or any brokers with whom you already invest.
There are federal programs available to the survivors of servicemembers who die during active duty, as well as for veterans who die from service-connected injuries or illnesses.
Survivors may be entitled to military survivor benefits after the passing of a servicemember or veteran. Navy Mutual representatives can help you understand and apply for those benefits.