Life insurance is a great idea, but that is just the beginning.
When you set up your policy, you also decide how the beneficiary receives the proceeds.
So, how do you choose the right life insurance settlement option for the death benefit payout?
Life Insurance Settlement Options
Make sure you choose carefully as your decision may be irrevocable.
The five most common life insurance settlement options:
Most people who buy life insurance will designate their beneficiary and not give it another thought.
That’s perfectly fine to do.
Life insurers would pay the death benefit as a lump sum unless another option was previously chosen.
Depending on how much life insurance you buy, another option for you to consider is how the beneficiary receives the proceeds.
A lump-sum payout pays the full death benefit to the beneficiary in one payment.
The beneficiary may spend the money as they see fit.
If you are required to have life insurance as part of a divorce decree, the lump sum option is probably best unless another option was agreed to.
But what if you are concerned about how the money will be spent?
Maybe a lump sum isn’t the best option for your beneficiary.
If that’s the case, take a look at these settlement options.
Fixed Income Option Insurance Settlement
A fixed income option insurance settlement is also known as a fixed period settlement, where the death benefit proceeds are paid to the beneficiary over time.
That timeframe can be 1-25 years, depending on the company.
Most companies pay the benefit monthly to the beneficiary.
Payments will include interest in the 0.75 – 1.5% range.
The death benefit received is still tax-free.
The interest earned will be taxable similar to if you had put the money in the bank.
When should you consider installments for a fixed period?
If you want to make sure the proceeds will last for a while,
Or, if you have concerns about the beneficiary burning through the money too quickly, the fixed income option may be a good choice.
Life Income Settlement Option
The life income settlement option provides your beneficiary with a monthly income for their life.
The beneficiary will receive the income for as long as they live.
Policies have “settlement options tables” that list the monthly income based on the age and gender of the beneficiary.
Sample monthly payment for a $100,000 insurance policy.
While each life insurance company may offer slightly different payments, they all tend to be very similar.
Some companies offer a joint and survivor life income that pays benefits for two people’s lifetime.
When the recipient dies, no further payments are made.
What happens if the full death benefit has not been paid out?
Companies offer a specific (guaranteed) period option that ensures payments for “x” number of years.
The second option is an “Installment Refund” option that pays out the remaining death benefit.
With interest payments, the insurance company holds onto the death benefit.
You can restrict the beneficiary’s access to the full death benefit until they reach an age determined by you.
The beneficiary receives the interest earned until they reach the age you set.
At that time, the beneficiary can receive the full death benefit.
You may consider this option if your beneficiary is a minor and you have no one else to monitor the funds.
Fixed Amount Settlement
You can choose to have your beneficiary receive a certain amount of money each year.
The payments can be made annually, semi-annually, quarterly or monthly.
The insurance company will pay this amount as long as the insurance proceeds last.
The death benefit held by the life insurer earns interest.
Who Chooses the Settlement Option?
Who gets to choose how the beneficiary gets paid?
During the insured’s lifetime, the owner may elect any payment option.
If the owner selects the payment option for the beneficiary, the beneficiary may not:
- Change the election
- Assign the money held by the insurer
- Withdraw any future installments
Once payments start, the option can’t be changed.
Beneficiary Elects Payment Option
If no option was chosen, the insurance company would give the beneficiary the option of choosing how to get paid.
The beneficiary may elect a lump sum or one of the other options available.
If the policy is collaterally assigned for a bank loan, the assignee’s portion of the death benefit is paid in a lump sum.
While most death benefits are paid in a lump sum, it’s good to know you have options.
Also, it’s essential for you to check the policy for any life insurance riders that may be part of the policy.
The reason is that additional benefits/options may be available to you.
If you need additional information on the overall life insurance process, our life insurance 101 guide offers an excellent overview.
At RiskQuoter, we term policies with durations from 1 to 40-year terms.
Michael J. Horbal
Owner of RiskQuoter
Too many people overpay for life insurance because they end up with the wrong life insurance company, agent, or both. That’s why I started RiskQuoter – To help you get the best life insurance rates available.
As an independent insurance agent, I’m licensed in all 50 states and the District of Columbia and offer 40+ life insurance companies to ensure you get your best rate!
By Michael Horbal – updated on – 10/02/2022