Understanding Your Life Insurance Settlement Options

And you might be surprised to learn that there are a variety of settlement options available besides the most common method—a lump-sum payout.

Depending on the life insurance company and policy, these options may be selected by the policyholder ahead of time or chosen by the beneficiary upon the insured’s death. Whether you’re the policyholder or beneficiary, it’s important that you understand these options in order to maximize the policy’s financial benefit and reduce potential taxes.

Here are six popular life-insurance settlement options:

1. Lump-sum: The beneficiary receives the full death benefit all at once in a single payment.

2. Interest Income: The insurance company retains the original death benefit and makes interest-only payments to the beneficiary. The original benefit may be paid in full to the beneficiary after a certain time period or to a contingent (alternate) beneficiary upon the primary beneficiary’s death.

3. Fixed Amount: The beneficiary is paid a fixed amount on a regular basis until the total death benefit (plus any interest accrued) has been paid out. If the beneficiary dies before all of the funds have been paid, a contingent beneficiary may receive the remaining amount.

4. Fixed Period: The beneficiary receives regular payments of both principal and interest over a fixed period of time, typically up to 30 years. If the beneficiary dies before the time period is over, the remaining balance may pass to a contingent beneficiary.

5. Life Income: The beneficiary receives guaranteed payments over the remainder of his or her life. The amount of the payments is determined by the insurance company and based on the beneficiary’s age and gender. The payments continue until the beneficiary dies. If he or she dies earlier than expected, the insurance company keeps the unpaid amount.