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I had a client email late last week in the midst of reviewing his new policy. He had found all of the annuity payment options available under the death benefit proceeds and was concerned that those were his only options.

The reality is that the default payment option is a lump sum as indicated on page 7 in the following attachment, a copy of one of my own policies. While there are a number of other payment options that can be chosen by the owner of the policy prior to the death of the insured, in the absence of that choice, policy proceeds are always provided as a lump sum.

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In most situations the owner and the insured are the same. A reason that an owner might choose an annuity to pay the proceeds out over time would be, for instance, a situation where the beneficiary is not good at money management. We’ve all heard of the lottery winners who’s lives have been turned inside out due to a large influx of cash. A large inheritance is certainly no difference and the best wishes of the insured can go right in the toilet by allowing someone who is ill equipped to be over run by cash.

One of the beauties of life insurance is the favored tax status it holds. With almost no exceptions life insurance proceeds are income tax free to the beneficiary. I say almost because there are a few ways to mess it up. Business people are famous for trying to deduct everything in their life but the IRS has deemed that if life insurance premiums are deducted as a business expense, the death benefit becomes taxable.

There is a way to work partially around that scenario by using the Section 162 executive bonus as a way to pay for life insurance. Rather than paying directly for the insurance premium, the company simply provides a bonus to the insured. The bonus is taxable as income to the insured, but is tax deductible to the company. But, it rights the ship and the death benefit retains its’ tax free status.

Bottom line. The owner of a life insurance policy has the right to choose options other than lump sum payments and should think that through. Lump sum may not always be the most prudent choice. If there is any concern about the payment method of life insurance premiums compromising the tax favored status, you should consult your agent or your accountant for counsel.