Do you know your Life Insurance Settlement Options?
You may have calculated the amount of life insurance coverage you think you need based upon the income requirement for your survivors. The requirement may be for a specific amount and a specific period of time or even for lifetime. How can the death benefits of a life insurance policy be structured to fulfill the needs of the beneficiaries when the insured dies? The answer is by utilizing Life Insurance Settlement Options available to the beneficiary through the life insurance company.
Simply put, Life Insurance Settlement Options are the different choices available to disburse the death benefit to the beneficiaries. The following are some of the most common options available:
Lump Sum: The beneficiary can request a lump sum payment of the entire life insurance death benefit income tax free. The lump sum choice allows the beneficiary the opportunity to invest the money to meet their own needs. Finding the correct investment option may be confusing and difficult considering the beneficiary just lost a loved one. The beneficiary also has the choice to spend the benefit amount right away which can be helpful if paying off large debts – such as a mortgage – is desired.
Interest Only: The beneficiary can leave the proceeds with the insurance company and receive interest payments based on the amount. The interest payments must be received, as they cannot remain with the proceeds and would be considered income taxable. This choice permits the beneficiary to take the time necessary to make the proper decisions. Later, they can remove the lump sum or take an alternative settlement option.
Fixed Period: The beneficiary can elect to receive income for a specified period and choose the number of years. The income received includes both the death benefit and interest payments. The interest received is taxable income. If the beneficiary of the life insurance death benefit dies before the full amount of money is paid to them, the remainder is payable to their chosen beneficiary. For example: John is a beneficiary of Betty’s life insurance policy and elects a fixed period of income for 10 years after Betty passes away. John dies after receiving only 7 years of income payments. In this case, the remaining death benefit would be paid to whomever John designated as his beneficiary when he elected this settlement option.
Fixed Payment: The beneficiary can elect to receive a fixed income for a specified amount until the proceeds are gone. The income received includes both the death benefit and interest payments. The interest received is income taxable. If the beneficiary of the life insurance death benefit dies before the full amount of money is paid to them, the remainder is payable to their chosen beneficiary.
Life Annuity: The beneficiary elects to receive a guaranteed income for life with no specified guaranteed period. The income received will include both the death benefit and interest payments. However, the interest received is income taxable. This settlement option provides the greatest amount of guaranteed income, however, the income stops when the beneficiary dies. There is no guarantee of the payout of the entire proceeds with this option and should be considered with caution.
Life Annuity with Period Certain: The beneficiary elects to receive a guaranteed income for life with a specified guaranteed period. The income received includes both the death benefit and interest payments. The interest received is income taxable. The beneficiary can elect to guarantee a period certain of 10, 15 or 20 years. For example: If the beneficiary elects a Life Annuity with Period Certain of 10 years and dies in year one, the beneficiary receives the remainder of the 10 years. Once the beneficiary receives income for 10 years and later dies, there will be no remaining income payments to beneficiaries.
Not all life insurance companies offer the same life insurance settlement options. In most instances, the beneficiary makes the decision as to how the life insurance proceeds are paid at the death of the insured, although many insurers permit the policy owner to select a settlement option before the death of the insured. The policy owner may feel the beneficiary does not have the financial competence to make the proper election at the time of the death of the insured. Selecting the proper Life Insurance Settlement Option can be a critical decision, as many of the options are final and cannot be changed after election is made.
Consider these common settlement options when calculating your life insurance needs for your beneficiaries as they can help guide you when choosing coverage amount.
About the author: Ken Buccico holds a LUTC designation and has been in the life insurance business for 39 years. His wealth of experience empowers clients to make best possible decision regarding a life insurance policy. To explore the best life insurance option, contact Ken at 1-800-651-1953 or KBuccico@Pivot.com