When retirees have policies such as annuities, they receive distributions from these investments that can provide them with income. As such, when you hold annuities, you can typically elect different ways to receive this money, and two common options include monthly distributions or lump-sum payments. Though monthly distributions have their benefits, choosing a lump-sum option can work for some investors. To help you gain additional perspective, here are some details to know about taking lump-sum payments.
What is a lump-sum payment?
A lump sum is a payment that you receive from the value of your asset as a one-time distribution. And the value of a lump-sum payment will usually be less than if you received the monthly payments.[i] Typically, if you choose this route, you give up the option of receiving monthly payments from your asset, such as your annuity.[ii] With annuities, you can often take lifetime maturity proceeds or a cash surrender value.[iii]
- Lifetime maturity proceeds: Your maturity proceeds are payments that occur when the principal amount of your security matures or gains full value, and the insurance company must begin distributions.
- Cash surrender value: You receive this when you choose to end your annuity policy early, before it matures or your insured event occurs. This sum of money is the savings component of your annuity. This value comes from what you built into a permanent life insurance policy and have available to you as the policyholder.[v]
How can you use the money from your lump sum?
Investors typically have two main benefits for taking the lump-sum payments over monthly distributions, since they receive a large sum rather than smaller monthly amounts.
- Ability to reinvest the money: You can use your lump-sum payment to invest into other assets. By doing so, you can potentially earn a higher rate of return than what you typically receive with annual payments.[vi]
- Additional income to support large purchases: Perhaps you want to buy a new house, yacht, or other expense item in your retirement. You can use the money you receive from your lump-sum payment to help you with large purchases, which would be more difficult with smaller monthly payments.[vii]
Will you have to address any taxes when taking a lump sum?
Yes, you will typically receive taxes when taking lump-sum payments for your annuity. The IRS will often tax the full amount you receive. But various details apply, so be sure to consult a tax professional to better understand the tax treatments you may experience with a lump-sum payment.[viii]
Ultimately, your retirement goals and financial needs will guide if taking a lump-sum payment makes sense for you. To explore whether this strategy is an effective option for your financial life, we’re happy to talk. Please contact us at (518) 581-1642.