Questions and Answers
Which of the following describes settlement options in life insurance?
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?
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What does the interest only option involve?
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The fixed-period installment option guarantees payments for a set number of years.
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In a fixed-amount installment option, what is a key aspect of the payment?
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What happens if the beneficiary dies before receiving all payments?
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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.
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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.