Settlement Option Life Insurance: Which is the best Option?

What Does settlement Option Life Insurance Mean?

Life insurance settlement options are the various ways life insurance death benefits can be paid out to beneficiaries. Which of the following settlement options in life insurance these include:

1. Lump-sum payment 
2. Interest only
3. Interest accumulation 
4. Fixed period 
5. Fixed amount 
6. Life income (also known as life-only or life annuity) 

1. Lump-sum payment or single payment

It means that the entire amount of the death benefit is paid to the beneficiary at one time. A lump-sum payment is one of the most basic forms of insurance and the most common among the kinds of life insurance settlements. After underwriting and processing your life insurance claim, the insurance company pays your beneficiaries in a lump-sum, tax-free amount. Like with any other life insurance payments, there are no limitations to what can be done with the money. The beneficiary could use the entire death benefit to pay for debts, to invest, or even on boats and cars.

However, if the money is invested in any way, then any returns generated from that investment would constitute income for tax purposes.

Well, you can easily guess that the lump-sum payments are perfect if you can rely on a beneficiary. If you are worried that your beneficiary could easily exhaust the funds, then turn your search to the other type of settlement which would offer a series of installments.

2. Interest only

In an interest only option life insurance, the insurance company retains the principal of the death benefit and only pays any earnings generated from it to the beneficiary. That means you have to take your money and contribute to or fill this account for your loved one and this is what this formation of the settlement format looks like. The beneficiary could receive regular interest payments and may get additional balances of the principal upon request. But no large cash payment is made upfront, so you can worry less about your beneficiary spending the money all at once. The purpose of an interest only option life insurance is to provide a consistent income stream to support the beneficiary’s lifestyle while leaving the principal sum alone so it can continue growing and serve as an emergency fund if the need arises. This is useful when the beneficiary is a young person or does not have so much experience in handling money.

You should compel your insurance company to clarify the investment of the death benefit after your demise. If you can then estimate the growth rate, you can then project the size of the interest payments that your beneficiary would receive.

3. Interest accumulation 

An interest accumulation settlement is not a payout at all. In this case, the insurance company holds the funds indefinitely on behalf of the beneficiary. The interest earned is added to the account balance. If the beneficiary needs to access the funds, he or she could request a withdrawal. As with an interest-only settlement, it’s wise to confirm that these funds will be invested to earn a competitive growth rate. 

You’d select an interest accumulation payout when the beneficiary is financially stable and plans to use the money as an emergency fund. 

4. Fixed period 

The fixed-period settlement option leaves the death benefit and earned interest with the insurer, who distributes equal payments over a specific period. That monthly check functions as tax-free income and can help your beneficiary cover living expenses. The purpose of the fixed-period settlement option life insurance is to ensure your beneficiary receives a consistent stream of income over a set length of time. It’s most appropriate when the beneficiary has a debt like a mortgage that requires consistent payments. The option is also good if the beneficiary is a resident in a nursing home or assisted living because the regular payments make it possible to pay for being in such communities.

You can also indicate a contingent beneficiary who will receive the payments upon the death of the primary beneficiary.

5. Fixed amount 

A fixed amount settlement structures the benefit as a fixed monthly payment. That payment will last until the principal and any earned interest are depleted. Your beneficiary may have the option to raise or lower the monthly amount. The fixed-amount settlement does discourage your beneficiary from spending the benefit all at once, but the money can still run out quickly if the payment is too high. You’d select this settlement format if your beneficiary needs temporary help with living expenses — to get through law school, for example. 

6. Life income (also known as life-only or life annuity) 

The life income option is comparable to an annuity. When deciding on this settlement option life insurance, 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 life income settlement format provides a stream of payments that lasts until the beneficiary passes away. A life annuity provides a reliable source of income, but there are drawbacks. If you request settlement as life-only, your beneficiary may not be able to change to a different settlement format. Extra withdrawals would not normally be allowed, either. It’s also likely you won’t know the payment amount. That’s because the payments would be calculated based on the death benefit and the beneficiary’s age when you pass away. Younger beneficiaries would get a longer stream of smaller payments. Older beneficiaries would get a shorter stream of larger payments. For that reason, life annuity settlements are often more advantageous to older beneficiaries.