When the named insured on a life insurance policy dies, the beneficiary (or beneficiaries) is eligible for the policy death benefit. Inside the life insurance policy, there are life insurance settlement options that pertain to the method in which the funds will be paid to the beneficiary. Normally, there are a number of different settlement choices that are available to the beneficiary (beneficiaries).
In many circumstances, beneficiaries will select the lump sum payment. This happens when the overall amount of the funds are settled at one time in one payment. Proceeding with this choice can often help the beneficiary in choosing to pay off large obligations such as funeral and burial expenses, as well as any other final debts of the deceased. The funds may additionally be used to replace the insured person’s income and helping surviving loved ones to pay ongoing living expenses moving forward.
If the beneficiaries would prefer not to collect the whole amount of the death benefit at one time, there are alternative settlement options that can be chosen. Several of the most common of these could include:
Interest Income Option
Using the interest income option, the life insurance company holds the funds and will pay a specified amount of interest on the funds. The interest can be disbursed on a monthly, quarterly, semi-annual, or annual schedule. When selecting this option, the beneficiary will have the capability to get a portion or all of the proceeds when needed.
This might be a suitable choice for individuals who do not really want the life insurance proceeds until a future date, for example, if the money was to be used for a child’s college education expense a number of years in the future.
Life Income Option
The life income option is comparable to an annuity. When deciding on this insurance settlement option, the policy’s beneficiary will be promised to get an income for the balance of his or her life – irrespective of how long it may be.
The exact amount of that income will always be dependent on the total of the policy death benefit, in addition to the age and gender of the beneficiary, as these are determining factors in the income recipient’s life expectancy.
Joint and Survivor Life Annuity Option
If using the joint and survivor life income annuity option, the beneficiary will be permitted to annuitize the death benefit payments structured upon two or more individual lives.
This would mean that the benefit payments will be dependent on the amount of benefit proceeds, as well as the life expectancy of the named beneficiary who is anticipated to live longer. The payout of the benefit proceeds will consequently continue to pass from one beneficiary to the other up until the last beneficiary has died.
Specific Income Option
Should the beneficiary choose the specific income option, they will get an equal measure of income each year for a specific number of years up until all of the benefit proceeds have been paid out.
Using this settlement option, if the beneficiary should die before all of the benefit income has been collected; another person could be chosen to accept the balance of the benefit payments until all benefit payments have been paid.
Fixed Period and Fixed Amount Options
The fixed period option will pay out both an amount of principal plus interest to the beneficiary during a stated time frame. If the primary beneficiary should die before the whole amount of the proceeds have been paid, the balance of the funds will be paid to the contingent beneficiary that was identified in the insurance policy.
Using the fixed amount settlement option, the death benefit proceeds will be given out in a fixed amount over time until both the principal and the interest have been totally paid out to the beneficiary. While using this specific option, the recipient (beneficiary) has the option to either increase or decrease the payment amount – and if they prefer, they could even change to a completely different settlement option entirely.
Choosing Life Insurance Settlement Options
When it comes to dispersing the death benefit proceeds from a life insurance policy, there are several options to pick from. Consequently, it is usually a good idea to discuss which strategy would work better with an expert in the life insurance field. This way, you can be confident that you comprehend how every option functions and which one would work most effectively for your specific situation.
In any event, irrespective of whether the life insurance proceeds are obtained as one lump sum or in an installment option, the primary amount of the proceeds is generally free to the beneficiary of federal income taxation.
Advance Settlement Planning
Obtaining the settlement from the life insurance policy is only about half of the battle. It is essential that you’re buying the best type of life insurance for your family, so when the time arrives to get the payout from the insurance company, your family has the funds that they will need. There are dozens of assorted factors that you should consider when searching for the best life insurance plan to accommodate your family’s needs.
There are two distinct kinds of insurance plans that you want to choose from, a whole life insurance policy or a term life insurance policy. Each one has its particular advantages and disadvantages that you’ll wish to consider based on your life insurance needs.
In addition to getting the right type of policy, it’s essential that you buy enough insurance coverage for your loved ones. Without sufficient life insurance coverage, you could very well leave them with added debts that they will not have the money to pay off.
Speak with an Independent Life Insurance Agent
Certainly, for most individuals and families, life insurance may be confusing enough without having to consider the many settlement options available to the beneficiary. Fortunately, this is a decision that can be made after the named insured passes, but it makes sense for your spouse or another family member who has been designated your beneficiary to understand their options in advance.
In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs. Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client. I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so. I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure. Please feel free to contact me at your convenience.
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