How Do Life Insurance Payouts Work?
Life insurance serves as a crucial safeguard for your loved ones in case something unexpected happens to you. With life insurance, your beneficiary will receive a lump-sum payment or installment payments depending upon the terms of your policy when you pass away. The beneficiary is the person you have named to receive the payout after your death.
Lump-sum Payments
A lump-sum payment is the most common payout option provided to the beneficiaries by the life insurance company. In this method of payout, the full value of the life insurance policy is paid immediately to the beneficiary as a single cash payment. The beneficiary can use this amount for various purposes – paying off debts, mortgages, and education. In some cases, the payout amount may be tax-free.
Installment Payments
Installment payments provide a guaranteed regular income to the beneficiary and are a way to ensure a stable source of income over the long term. With the installment payment method, the life insurance company pays out the policy’s amount in regular installments. The beneficiary can choose to receive payments monthly, bi-annually, or annually. Installment payments usually continue for a fixed period, which is pre-determined in the policy agreement.
Effect On Taxes
Life insurance payouts are usually tax-free for the beneficiary. However, there are some exceptions to this rule. For instance, if the policy owner has named his estate or a trust as the beneficiary, the payout amount may be subject to estate tax. Moreover, if the payout amount earns interest, the interest may be taxable. If you have any concerns about how your life insurance payout may affect your taxes, you should consider consulting with a tax professional.