The death proceeds of a life insurance policy can be paid out in a variety of options. In some cases, the policyholder may designate a specific settlement option to be paid upon his or her death.
If the policy owner does not choose a specific option, the beneficiary or beneficiaries will select their payment method. They may select from a series of different options, which are explained below.
The death proceeds of a life insurance policy are paid to the beneficiary or beneficiaries through one lump-sum payment. While the beneficiary can withdraw all of the proceeds in one lump sum, they can also make partial withdrawals as funds are needed by merely writing checks. The benefit of doing this is that the balance in the account continues to earn interest until withdrawn.
Even though the beneficiary can leave the benefits in the account and earn more investment income, over 90 percent of beneficiaries still choose a single lump-sum withdrawal option and take possession of all the proceeds in one sitting.
Policy proceeds plus interest are used to pay out a specific amount of income at regular intervals until the proceeds are exhausted.
The beneficiary may have the right to increase or decrease the amount of payments, or to change to a different settlement option. In some cases, the beneficiary may also have the right to withdraw part of the entire amount at one point depending on what the policyholder instructed.
The option pays the beneficiary principal and interest over a fixed period of time.
If the beneficiary dies before receiving all of the payments, then the remaining payments are sent to the contingent beneficiary, or to the estate of the primary beneficiary, if there is not contingent beneficiary.
This option is typically selected if the insurance proceeds are not needed until sometime later – to pay for college. The insurance company retains the money and pays a minimum interest rate on it. Interest can be paid monthly, quarterly, semi-annually or annually.
With this option, the beneficiary is provided with a single-premium annuity that supplies the him or her with lifetime income. The amount of payments depends on the amount of the insurance and the expected lifetime of the beneficiary – the longer the expected time, the smaller the payments. Thus, this option is best for older beneficiaries.
Want to learn more about life insurance? Read our article The Most Frequently Asked Life Insurance Questions.