Getting the Most out of Your Lincoln Financial Life Insurance Payout

When a loved one passes away, it can be an incredibly difficult time. But life insurance can provide some financial stability during this challenging period. Lincoln Financial offers several payout options on their life insurance policies to provide maximum flexibility. This guide will explain the different Lincoln Financial life insurance payout choices available and how to select the best approach for your unique situation.

Overview of Lincoln Financial Life Insurance Payout Options

Lincoln Financial offers beneficiaries several options for receiving life insurance proceeds. These include:

• Lump-Sum Payment: The total death benefit is paid out in one lump sum. This is the default option if no other payout method is selected.

• Life Only Payments: Proceeds plus interest are paid in installments as long as the beneficiary is living. Payments cease upon the beneficiary’s death.

• Life with 10 Years Guaranteed Payments: Proceeds plus interest are paid in installments as long as the beneficiary is living. If the beneficiary dies within 10 years of payments starting, Lincoln Financial continues payments to a secondary beneficiary for the remainder of the 10 years.

• Refund Annuity Payments: Proceeds plus interest are paid in installments based on the beneficiary’s life expectancy. If the beneficiary dies before receiving the full amount, payments continue to a secondary beneficiary until the total equals the death benefit amount.

• Period Certain Payments: Equal installments are paid over a set time period from 1 to 30 years. If the beneficiary dies before all payments are made, the remaining payments go to a secondary beneficiary.

• Amount Certain Payments: Equal installments of a set amount are paid until the proceeds plus interest are exhausted. If the beneficiary dies before that point, payments continue to a secondary beneficiary.

Beneficiaries can select the frequency (monthly, quarterly, semi-annually, or annually) and payment method (check or direct deposit) for installment options.

Factors to Consider When Selecting a Payout Method

Choosing a life insurance payout method requires weighing several factors:

Time Horizon

• Short term needs: Lump sum or 1-5 year period certain payments provide funds quickly.

• Long term income: Life only, life with 10 years guaranteed, or refund annuity payments create lifetime income.

Taxes

• Lump sums and period certain payments are taxed immediately.

• Life only, life with 10 years guaranteed, and refund annuity payments spread taxes over time.

Interest Rates

• When rates are low, lump sum or short-term period certain payments allow beneficiaries to seek higher returns by investing the funds.

• When rates are high, life only or guaranteed installment options lock in a fixed return.

Secondary Beneficiaries

• For beneficiaries with dependents, life with 10 years guaranteed and refund annuity options continue payments.

• Period certain payments also continue if the beneficiary dies before the end of the term.

Personal Factors

• Age and life expectancy
• Other income sources and savings
• Financial goals and responsibilities
• Preference for predictable payments or flexibility

Strategies for Different Situations

The best payout method depends on each beneficiary’s unique situation. Here are some examples:

Young Surviving Spouse

For a younger spouse who needs ongoing income, life only payments or refund annuity can provide lifetime income to support living expenses. This ensures they can maintain their lifestyle while allowing their remaining assets to stay invested for growth.

Older Surviving Spouse

An older spouse may want predictability to align with their more immediate income needs. Life with 10 years guaranteed or a longer period certain term locks in payments for 10+ years. This protects against longevity risk without tying up assets indefinitely.

Adult Children

Adult children often prefer lump sums for maximum flexibility. This allows them to pay off debts, make investments aligned with their risk profiles and goals, or fund large planned expenses like a home purchase. A period certain payout can also provide income to cover near-term financial obligations.

Minor Children

For minor children, a life with 10 years guaranteed or refund annuity option keeps income flowing until they reach adulthood and can assume control of the funds. This provides stability during a formative time.

charities

Charities typically prefer lump sums so they can immediately use funds to further their mission and capitalize on bequests for fundraising.

Final Expenses

If the primary goal is covering funeral and estate administration costs, a 1-2 year period certain payout may be optimal. This ensures funds are accessible to pay expenses and wrap up affairs, after which remaining assets can be distributed.

installation method selection for consistent payments

Along with the payment schedule, beneficiaries must select the method for receiving installments. This includes:

Checks

• Pros:
  • Familiar and tangible payment method
  • Provides flexibility to deposit/cash checks as needed
• Cons:
  • Security risks of paper checks getting lost/stolen
  • Need to cash or deposit regularly
  • If a check isn’t deposited it will go stale and need to be reissued
  • More complicated for the insurer to coordinate check issuance

Electronic Funds Transfers (EFTs)/Direct Deposit

• Pros:
  • Secure and reliable
  • Funds immediately available in bank account
  • Convenient – no need to deposit
  • Lower administrative costs for insurer
• Cons:
  • Need to provide bank account information
  • Payments are made on a set schedule – less flexibility
  • Changes to bank account can disrupt payments until updated

For most beneficiaries, direct deposit provides significantly more convenience and security with smoother, predictable payments. But checks allow the flexibility to cash sporadically or in different accounts.

Taxes on Life Insurance Payouts

Taxes are also an important factor in selecting a payout approach. Here are some key tax considerations for life insurance payouts:

• Lump sum payouts are fully taxable as ordinary income in the year received.

• Installment payments via life only, life with 10 years guaranteed, and refund annuity options only have the interest portion taxed as ordinary income – the principal is received tax-free.

• Period certain payments are also part taxable interest and part tax-free return of principal each year.

• If the policy is over $5 million, special rules apply to calculate the tax-free principal portion.

• Life insurance payouts are not subject to state/federal estate taxes or income taxes.

Lump sums result in the highest immediate tax liability. Installment options spread the tax burden over time while enabling tax-deferred growth on principal. Consulting a tax advisor can provide guidance on structuring payouts to optimize after-tax income.

How Interest Rates Impact Payouts

The interest rate paid on life insurance payout settlements impacts installment options. Lincoln Financial pays the greater of:

• The fixed interest rate stated in the policy terms
• Lincoln Financial’s declared interest rate at the time proceeds are paid

When policy rates are higher than current market rates, installment options lock in an attractive fixed return. However, when policy rates are lower than market rates, lump sum payouts allow beneficiaries to seek higher returns through their own investments.

Guaranteed installment options limit investment flexibility but provide stable, predictable income immune to market volatility. Consider current rates and expected market performance when assessing tradeoffs between lump sums versus installments.

Coordinating With Other Assets

Beneficiaries should look at life insurance payout decisions in context of their overall finances. Key factors include:

• Age: Younger beneficiaries have longer time horizons, allowing more flexibility. Older beneficiaries may need immediate income.

• Other Income Sources: Beneficiaries with pensions, social security, annuities or other steady income flows can take more risk with life insurance proceeds.

• Savings and Investments: Large existing portfolios allow beneficiaries to take lump sums for reinvestment. Smaller savings may warrant installments.

• Debt Levels: Beneficiaries with high debts may use lump sum payouts to pay off obligations and reduce interest costs.

• Financial Dependents: Beneficiaries with minor children or dependent parents may prefer installment options to guarantee ongoing income for dependents.

• Future Goals: Lump sums allow beneficiaries to fund large future goals like retirement, college, or home purchases. Installments help cover routine living expenses.

Assessing the total financial picture allows aligning payouts with both short and long-term needs.

Step-by-Step Process for Selecting a Payout

Follow this step-by-step process when claiming life insurance proceeds:

1. Review policy terms: Understand available payout options, interest rates, taxes, and claims procedures.

2. Assess needs: Consider short and long-term income needs, taxes, and how comfortable you are managing investments.

3. Discuss options with financial professional: They can help analyze the pros and cons of different options.

4. Select settlement approach: Choose the best payout method aligned with your financial situation.

5. Choose installment options: For installments, select payment frequency