Settlement Options for Life Insurance Policies

Like an annuity, a life insurance beneficiary can choose from several settlement options. 

The “lump sum option” is simple, and as the name suggests, the beneficiary receives a “lump sum” benefit from the policyholder’s life insurance benefit. This benefit is awarded tax-free to the beneficiary. 

The “fixed period” option allows the life insurance company to invest the proceeds of the life insurance policy into an interest-bearing account. This account will make equal payments during regular intervals for a set amount, or “period” of time. Payments include principal and interest. 

The payment amount is determined by

1. Amount of benefit (size of principal) 
2. Interest rate earned by the life insurance company
3. Length of time involved. 

The “fixed amount” settlement option pays the beneficiary a determined amount at regular intervals until both the principal and interest are depleted. Keep in mind that the disbursements received are fixed but the length of the benefit can vary depending on the interest earned by the life insurance company. 

An important consideration a life insurance beneficiary will ask, “Is it better to have an uncertain amount of income for a specified period of time, or fixed amount for an uncertain period?” Thinking carefully, it means that the beneficiary can choose to be paid for an exact period, “fixed-period”  or to receive a lump sum payment on a consistent basis. 

In the “Life Income” settlement option, the proceeds of the life insurance policy are annuitized to provide guaranteed income for life. Keep in mind, with annuities, the beneficiary’s age expectancy is taken into account. The beneficiary’s age along with the life insurance benefit will determine the guaranteed payout amount. 

The “interest-only” settlement option is where the life insurance company retains the proceeds of the benefit and invests the principal. The life insurance company then guarantees a minimum rate of interest. The beneficiary is also entitled to receive more than the guaranteed minimum, as well as choose the period; monthly, quarterly, semi-annually, annually.