YOU ASK:

What life insurance settlement options do I have?

WE ANSWER:

Whether you are a policy owner, or a beneficiary who has been granted irrevocable rights to a policy, you can select the ways in which the proceeds can be paid after the insured's death.

Here are the most common life insurance settlement options you can choose from:

Lump Sum Payment

When the insured dies, immediate cash is needed to meet various funeral and other administrative expenses. Under this option, the proceeds are paid to the beneficiaries in a lump sum. This is usually done within weeks of the insured's death.

However, this option has one major disadvantage: a windfall like that can result in the funds being spent unwisely due to poor finance management.

Interest Option

The insurer retains the proceeds and pays the beneficiary an interest rate monthly, quarterly, semiannually or annually. A minimum interest rate of 3% payable by the insurance company is typically guaranteed and can be increased by payments of 'excess' interest, for example in a participating policy. The beneficiary is usually given the right to change to another settlement option or to withdraw the proceeds.

The interest option is particularly appropriate for retaining certain funds whereupon the money will be needed in the future, for instance, for education.

Fixed Period Installments

The proceeds are paid to the beneficiary in equal amounts over a specified period of time on a monthly, quarterly, semiannual or annual basis. If the primary beneficiary does not survive to the end of the payment period, the remaining part of the proceeds is paid to the secondary beneficiary or to the primary beneficiary's estate.

This option should be used with caution as it is very inflexible.

Fixed Amount Option

Under this option, the proceeds are paid to the beneficiary in the form of fixed payments for as long as the proceeds (both principal and interest) are exhausted.

The fixed amount option is very flexible in that the beneficiary is given the rights to withdraw the funds, switch to another settlement option, increase or decrease the fixed installments.

Life Income Options

Payments are made over the beneficiary's lifetime. You can choose between the following life income options:

  • Straight life income - installments will last only as long as the beneficiary is alive. This option provides the highest annual income because it ceases when the beneficiary dies.
  • Life income with guaranteed period - The insurer makes payments for a certain period of time chosen by the beneficiary. If the primary beneficiary dies before the end of that period, the contingent beneficiary receives the remainder of the guaranteed payments.
  • Life income with guaranteed total amount - Under this option, the beneficiary receives a guaranteed total amount of the proceeds. If the beneficiary dies before receiving the whole amount of the proceeds, the installments continue until the total amount paid equals the total amount of the insurance.
  • Joint and survivor income - Payments are made to two individuals, such as husband and wife, during their lifetimes and continue for the life of the survivor.
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