When you are considering how to set up your life insurance payout, you need to know all the choices that are available to you. We will explain the different life insurance settlement options so that you understand what they are and how they work.
The process of obtaining life insurance can sometimes feel confusing, but it is important for you to be informed about all the choices at your disposal. Upon the policyholder’s death, the beneficiaries they designated will be paid the benefits of the policy–otherwise known as the “settlement.”
Many people choose to have a lump sum payout, where the entire amount is provided to the beneficiaries at once. This is not the only option available. In fact, there are many different options ready for you to choose from.
In this article, we will explain the choices available to you. Also why they may or may not make sense for your situation. Let’s jump right in.
Annuitized Payments Life Insurance Settlement Option
Instead of choosing the lump sum, you can opt to annuitize your payments. Put simply, the money can be spread out in some form. This is for either a set period of time or the rest of your life.
By choosing an annuity, you may find it easier to budget the death benefits you receive, making them last longer. If you are planning for retirement, this can be especially helpful.
Instead of having the full amount of the death benefit paid to you all at once here’s another option. You can elect to pay out dividends for a certain amount of time until the full amount has been reached. For example, you can choose to have biweekly or monthly payments issued.
You can also elect for a secondary beneficiary to receive the remaining amount if something happens to you. Any interest is included in the payout of death benefits, as well.
Fixed Period Life Insurance Settlement Option
This kind of life insurance settlement is similar to the fixed amount. You will receive a fixed payment of both the actual benefit and its interest at the same time. This payment will continue until a fixed period of time has been reached.
Usually, the amount of time caps at around 30 years. The International Risk Management Institute also classifies this kind of policy as one that is “left on deposit with the insurance company to accrue interest.”
The form of payout involved in a specific income settlement falls under the “fixed amount” umbrella. However, the benefit payments will continue until the proceeds are completely gone.
Like fixed payout settlements, the life insurance company keeps the death benefit while it is being paid out. This means that your money continues to generate interest. This rate depends on both the insurance provider and individual plan.
The benefit here is that you may end up with a final payout that is worth more than the original amount guaranteed. This depends on the amount of interest the money has accrued.
Choosing the interest income option means just what it says. Only payments of the interest accrued are sent to you. The actual death benefit is retained by the insurance company.
The date when the full payout is given to you depends on the life insurance company. As well as the policy the owner chose. Again, if the original beneficiary passes away, you have the choice of a secondary entity to receive the death benefit.
This kind of policy can be incredibly helpful if you want to save money for future expenses. Or if you have liquid assets prepared for retirement. You have the ability to request the full payout once the date selected by the insurance company has passed.
Life Income Life Insurance Settlement Option
The life income option is connected to your life. The life insurance company will send you benefit payments that they calculate. This is based on their business policy, as well as your gender and age upon receiving benefits.
With this option, you will be set for the rest of your life. The catch, however, is that once you pass away, the payments stop. The life insurance company keeps whatever remains of the death benefit.
Life Income Period Certain
Unhappy with the potential drawbacks of the life income policy but still want to reap the benefits? You can choose a life income period certain policy. The rule about you receiving payments for the rest of their life still applies. Although the payment is usually a little smaller each month than it would be for a general life income plan.
However, the period certain plan includes a contingency in case you die within a “certain period” of time. If this event occurs, the policy passes to a secondary beneficiary. This would be for the rest of that time period.
For example, if the period is set at twenty years and you pass away in five years into the plan, a secondary beneficiary receives death benefit payments for the next fifteen years until the period ends.
Life Income Joint Survivor Life Insurance Settlement Option
Joint and survivor payments allow for two beneficiaries at the same time–you and another person the policy owner names. Again, these payments are generally less than for a general life income policy.
However, this kind of settlement has the benefit of lasting as long as one of the spouses is still alive. Some policies mitigate this bonus by paying a little bit less once one of you passes away. But this depends on the insurance company.
Most life insurance policies provide benefits after the policyholder’s death. But you can actually have some benefits during your life such as using your life insurance as a cash asset.
If you choose to benefit from your life insurance policy while you are still alive, you have options. If you have a whole life insurance policy, you can use the cash value that you have already paid. This would work as a new premium payment for a term policy.
Since you will have paid in a lump sum up-front, you shouldn’t have to pay premiums for the duration of your term policy. If you are of the right age and life circumstances, this move can be a strong choice. However, remember that term policies have a fixed end date after which you will completely lose coverage.
Briefly, reduced paid-up life insurance policies are similar to pre-paid term policies. You can use cash value to pay the premium for a different policy.
These kinds of policies, however, are different from the term policies in that they are permanent. In exchange for receiving a lower death benefit, you will no longer have to pay any premiums at all. This is because they are literally “paid-up.”
If cash value as a concept is still a little confusing, learn more about cash value life insurance here. Remember that only whole life insurance policies can accrue cash value–this is not a feature of term policies.
Cash Surrender Life Insurance Settlement Option
This form of settlement is the simplest way to benefit from your own life insurance policy. Especially while you are still alive. In a cash surrender, you forfeit the death benefit in order to get the cash value of everything you have paid into the policy over the years.
You can either receive a check for the lump sum value of your cash. Or you can opt to set up an annuity or immediately start another policy, perhaps one that is already paid-up. This may be a good option if for retirement and in need of some liquid assets on a consistent basis.
Consult a Professional
When you are ready to think about your life insurance settlement options, it’s time to speak with an insurance agent. After all, you want to make sure that the life insurance policy you choose works for your individual needs, age and circumstances.
Once you’re prepared to talk about life insurance, contact us at NextGen Life Insurance to get a free quote. We will help you compare them to other top life insurance carriers. We will also make sure that you have the best policy for both you and your beneficiaries.