When a person files for a life insurance policy, he/she pays a periodic premium to the insurance company. Upon death of the policyholder, the insurance company has to pay the coverage amount to the beneficiary whose name is recorded in the insurance contract. Usually, payment of a lump sum amount upfront imposes a huge tax burden on the beneficiary. In order to tackle this issue, insurance companies sometimes provide the option of availing payments on a “stretch annuity” basis.
In a stretch annuity, the beneficiary can choose to receive proceeds of the policy on an annual basis stretched over a period of time, which is usually the life expectancy of the beneficiary. Through such a distribution of income, the beneficiary gets to defer taxes over a longer timeframe and this eases his/her tax burden. However, there is a minimum payment that the beneficiary has to adhere to receive every year and it is up to the beneficiary’s discretion to receive more than the stipulated minimum amount.
Even though stretch annuities provide a lot of benefits to the beneficiary of an insurance policy, such options are seldom offered by insurance companies.