Life Insurance Chapter 5: Settlement Options

Questions and Answers

Which of the following describes settlement options in life insurance?

They are only for beneficiaries who are minors.

They are lump sum payments only.

They allow immediate access to all policy funds.

They are ways life insurance proceeds can be distributed other than lump sum. (correct)

What is the primary benefit of using settlement options over a lump sum?

Settlement options allow for gradual disbursement of funds which can earn interest.

There are five settlement options: Lump sum, Interest only, , , Life income.

Fixed-period installments, Fixed-amount installments

What happens to a lump sum payment regarding taxes?

A lump sum payment is not taxable to the beneficiary. Signup and view all the answers

What does the interest only option involve?

It allows the insurer to retain proceeds and pays out only the interest to the beneficiary. Signup and view all the answers

The fixed-period installment option guarantees payments for a set number of years.

True Signup and view all the answers

In a fixed-amount installment option, what is a key aspect of the payment?

The payment amount is specified instead of the time it will be paid out. Signup and view all the answers

What happens if the beneficiary dies before receiving all payments?

A contingent beneficiary may continue to receive payments. Signup and view all the answers

Study Notes

Settlement Options Overview

Settlement options provide beneficiaries with methods to receive life insurance policy proceeds, beyond a single lump sum cash payment.
These options were developed to improve financial management for beneficiaries, especially those who may struggle with large sums of money.

Key Settlement Options

Five settlement options are available:
- Lump Sum
- Interest Only
- Fixed-period Installments
- Fixed-amount Installments
- Life Income

Lump Sum

The lump sum payout remains a popular choice and is not taxable for the beneficiary.
If no settlement option is chosen by the policyowner, the default is a lump sum payment.
Once a settlement option is selected, it is irrevocable by the policyowner.

Interest Only

Acts as a temporary method, where the insurer holds the policy proceeds and pays only the interest accrued.
Beneficiaries receive scheduled interest payments while the principal remains intact.
Minimum guaranteed interest rates are promised to beneficiaries.
This option might be paired with other settlement options, particularly when multiple beneficiaries are involved.
Conditions may allow beneficiaries to withdraw the principal after set timeframes or ages.

Fixed-period Installments (Period Certain)

Payments are guaranteed for a specified duration (e.g., 5, 10, or 15 years).
Installments are determined by the total policy proceeds, chosen period, and interest rates.
Ensures funds are depleting over a fixed time, with the principal reducing to zero by the end of the term.
If the beneficiary dies before the term ends, a contingent beneficiary continues receiving payments.

Fixed-amount Installments

Payments are made in fixed amounts until the proceeds are exhausted.
The duration of payments varies based on the installment size and total policy proceeds.
Guaranteed income is provided until the funds are depleted, ensuring continuity for potential contingent beneficiaries.

Description

Explore various settlement options in life insurance beyond lump sum payouts. This chapter covers the different methods beneficiaries can receive policy proceeds after the insured's death or policy endowment. Understand which options may suit different financial situations.