How to choose the right life insurance settlement option.
Life Insurance Settlement Options
Make sure you choose carefully as your decision may be irrevocable.
The 5 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 will pay the death benefit as a lump sum unless another option was previously chosen.
A lump-sum payout pays the entire death benefit to the beneficiary in one payment.
The beneficiary may spend the money as they see fit.
But what if you have some concerns 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
Fixed income option insurance settlement is also known as a fixed period settlement where the death benefit proceeds are paid to the beneficiary over a period of 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 yourself.
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 during the lifetime of two people.
When the recipient dies, no further payments are made.
What happens if the full death benefit has not been paid out?
Companies offer a certain (guaranteed) period option that ensures payments for “x” number of years.
The second option to consider 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 out 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 will 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 important for you to check the policy for any life insurance riders that may be part of the policy.
The reason why is that there may be additional benefits/options available to you.
Michael Horbal is the founder and owner of RiskQuoter.com and a licensed life insurance agent who has helped thousands with affordable protection for families and businesses.