Posted : 03/07/2013
When it comes to life insurance, you may think beneficiaries can only receive payments in a lump sum.
But there's another option some insurers are beginning to offer -- policyholders can opt to require beneficiaries to receive the money in installments over a set period of time.
That may be a wise move if you think a large windfall may bring additional stress to a spouse, child or other relative already mourning a death in the family, says Catherine Theroux, spokeswoman for the financial research firm LIMRA.
"After the death of a loved one, your survivors may not want to worry about what to do with the money, especially if it's a large amount," she says. "It may not be the best time to make such decisions and progressive payouts may allow beneficiaries to adjust over time to their new wealth."
Further, says Theroux, it might help to curb an urge for beneficiaries to take the money and run -- right to a place like Las Vegas to spend it. This could be at odds with the policyholder's desire to provide a stable form of income for a family member. (See: "5 keys to choosing permanent life insurance.")
If you're on the receiving end, a mandated installment payout may help you manage your finances better, says Theroux. "Remember that life insurance is often seen as a way to replace some of the lost income provided by someone," she says. "The amount you receive may seem like a lot of money at the time you get it … you may feel like you're very rich. But it's good to be a little patient and focus on the long-term and how the money can help you over time." (See: "How to evaluate term life insurance.")
Among the first to offer such a plan is Minnesota Life, through its partner AMZ Financial Insurance Services. The new life insurance product, Omega Builder IUL , includes the "income protections agreement" feature, which "allows policy owners to arrange for the death benefit to be paid as an irrevocable settlement option in a combination of installment payments and lump sum payouts," according to a company statement released in late February.
"We all have heard stories about people falling into large sums of money, only to see it go up in smoke," says Jason Konopik, AMZ Financial's chief financial officer. "The reality is that a predictable stream of income, rather than a lump sum, helps beneficiaries maintain a consistent lifestyle." (See: "How much life insurance do you need?")
Know the tax implications if you choose to require installment payout
There are, however, tax implications if you go the installment route, notes William H. Byrnes, an associate dean at the Thomas Jefferson School of Law in San Diego, in a report he co-authored with colleague Robert Bloink. The report points out that any interest accrued by the proceeds being held by the insurer can be taxed. But a lump sum payout comes tax-free.
Byrnes and Bloink add that insurance companies need to make it clear to clients that "owner-directed distributions" cannot be reversed once in place.
But both are still fans of these new products because these policies can give prospective purchasers exactly what they have been looking for - control.
What motivates us to buy life insurance as we grow older?
A 2012 study by Northwestern Mutual provides some insight into how our age affects why we consider or actually purchase life insurance. The company, which surveyed more than 2,000 people, found that:
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