When a loved one passes away, the financial security provided by their life insurance policy can offer significant relief. However, beneficiaries often face an important decision: should they take the payout as a lump sum or an annuity that provides payments over time? Understanding the pros and cons of each option can help you make the best choice for your financial future.
Understanding Your Options
Most life insurance companies offer two primary ways to receive a death benefit:
- Lump sum payment: A one-time, tax-free payment of the entire policy amount.
- Annuity payments: Periodic payments distributed over a set number of years or for the beneficiary’s lifetime.
Which Option Is Best for You?
The right choice depends on your financial situation, spending habits, and long-term goals. A lump sum may be the right option for you if you have immediate financial needs or investment experience, while an annuity can provide a steady income stream. Below are the pros and cons of each option.
Pros and Cons to Consider When Taking a Lump Sum Payment
Do you need immediate access, want financial stability, have an investment plan ready? Then consider:
| Pros: |
Cons: |
| Immediate access to funds. A lump sum provides full access to the money right away, allowing you to cover urgent expenses such as funeral costs, outstanding debts, or mortgage payments. |
Risk of mismanagement. Without careful budgeting, some beneficiaries might overspend or make poor investment decisions. |
| Financial flexibility. You can invest, save, or spend the money as needed without restrictions. |
Taxable investment growth. While the lump sum itself is tax-free, any interest or gains earned from investing it could be subject to taxes. |
| No risk of reduced payments. Receiving a lump sum upfront guarantees you receive the full amount since annuities can be affected by interest rates and insurance company policies. |
Lost potential for lifetime income. A lump sum does not provide the security of ongoing payments over time. |
Pros and Cons to Consider When Choosing to Take Annuity Payments
Do you need to retain access to investment expertise, want a steady, dependable income stream or protection from market movements? Then consider:
| Pros: |
Cons: |
| Steady, predictable income. An annuity ensures a reliable stream of income over a specified period, up to your lifetime. |
Lack of immediate full access. If you need a large sum for an emergency, you will be limited on the amount you can withdraw at one time. |
| Reduced risk of overspending. Since funds are distributed over time, there’s less opportunity to deplete the money quickly. |
Inflation risk. Fixed annuity payments could lose purchasing power over time due to inflation. |
| Potential for interest earnings. Some annuities accrue interest, increasing the total amount that you will receive over time. |
Company solvency risk. This is atypical, but your ability to receive payments depends on the financial stability of the issuing insurance company. |
If you choose to maintain an annuity, Armed Forces Mutual can help. We prioritize your well-being by ensuring a seamless and efficient process for managing annuity payments. As a beneficiary, you can count on us to maintain the security and delivery of your funds:
- Automated system setup. Your annuity payments will be processed accurately and on time.
- Monthly payment processing. You can depend on reliable and consistent annuity disbursements that help provide for your long-term financial stability.
- Easy withdrawal requests. Let us know anytime if you need to make a withdrawal or change your annuity structure.
- Dedicated support. We’re here to support you and answer your questions about your annuity options.
We Can Help
Armed Forces Mutual has supported military family finances since our founding in 1879. You can count on us for trusted, affordable solutions that help ensure your financial independence. No matter how you decide to receive your life insurance payout — as a lump sum or an annuity — contact us at 800-336-4538 to discuss your options and how your choice might affect your finances.
Looking specifically for assistance with strategizing your lump sum or annuity? AAFMAA Wealth Management & Trust LLC (AWM&T) provides experienced and trustworthy financial planning, investment, and wealth management services (account minimum applies). Call 910-307-3500 to speak with one of our professionals and explore your options.