Haris Ashley
Life insurance settlement options include a range of payment structures, from lump-sum payments to regular payments for a fixed period or the beneficiary's lifetime. One option that guarantees payments for the lifetime of the recipient is the 'life income with period certain' option. This choice provides regular payments for the recipient's entire life and, in the event of their death during the specified period, payments will continue to a designated beneficiary until the end of that period. For example, if the recipient passes away after 10 years of a 20-year 'life income with period certain' plan, their chosen beneficiary will receive the remaining 10 years' worth of payments. This option ensures a steady income for the recipient and financial security for their chosen beneficiary.
| Characteristics | Values |
|---|---|
| Payment Options | Lump-sum payment, regular payments, or a viatical settlement |
| Lump-sum Payment | Provides full access to the death benefit at once |
| Interest Income | The insurance company holds the principal of the death benefit and pays the interest earned |
| Interest Accumulation | The death benefit is left with the insurer in an interest-bearing account |
| Fixed Period | Regular payments for a set period, usually five years or less |
| Lifetime Income | Regular payments for the beneficiary's lifetime |
| Life Income with Period Certain | Regular payments for the recipient's lifetime or a specified period, whichever is longer |
What You'll Learn
Lump-sum payment
A lump-sum payment is the most common settlement option for life insurance policies. It allows the beneficiary to receive the entire value of the policy in one go, providing them with full access to the death benefit. This option is particularly useful if the beneficiary needs quick access to cash, as it can be used to pay off debts such as a mortgage. The beneficiary can also choose to save or invest the lump sum.
The lump-sum option gives the beneficiary full control over the money, allowing them to spend it as they see fit. However, receiving a large amount of money all at once can be overwhelming, and it is up to the beneficiary to make it last. If the payout is large, the beneficiary may need to spread it across several bank accounts to stay within Federal Deposit Insurance Corporation (FDIC) limits.
The default payout option for most policies is a lump sum. However, beneficiaries usually have the option to choose how they want to receive the payout, and it is important to understand the different options available before making a decision.
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Interest income
With an interest income option, the insurance company acts as a savings account for the beneficiary. The beneficiary receives regular interest payments, which can support their lifestyle, while the principal sum continues to grow. This option provides flexibility, as the beneficiary can access the full or partial principal sum at any time. It is important to note that any interest earned or paid out as part of a life insurance settlement option is typically taxable as regular income.
When choosing an interest income option, it is essential to consider the growth rate of the investment. By estimating the growth rate, beneficiaries can project the size of the interest payments they will receive. Additionally, beneficiaries should ask the insurance company to explain how the death benefit will be invested to ensure it earns a competitive growth rate.
The interest income option is a good choice for beneficiaries who want the security of a consistent income stream while also having access to the principal sum if needed. It provides flexibility and financial stability, making it a popular choice for life insurance settlement.
Overall, the interest income option for life insurance settlement offers beneficiaries a steady stream of income, flexibility in receiving funds, and the potential for long-term financial security. It is an important option to consider when deciding on the best life insurance settlement option for one's needs.
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Fixed period
The fixed-period option is a life insurance benefit that allows beneficiaries to receive settlements in equal, periodic payments for a fixed period of time or a specified number of years, instead of a lump sum. This option is ideal for individuals who need coverage for a short period of time, such as those with short-term loans or mortgages. It is also known as fixed-term insurance or term insurance.
The fixed-period option provides the flexibility to choose a policy term ranging from one month to several years. The policyholder pays a set premium for the specified period, and the proceeds are left on deposit with the insurer to accrue interest. This interest accrual ensures that the unused portion of the principal sum continues to earn interest during the fixed payment period.
The fixed-period option is a more affordable alternative to permanent life insurance policies, as the premium is based on the length of the term. It provides a death benefit, which is paid to the beneficiary if the policyholder passes away before the policy expires. Additionally, some policies may offer a cash value that the policyholder can utilise during the term.
It is important to note that at the end of the policy term, the coverage ends, and the policyholder will need to purchase a new policy if they wish to continue coverage. This option provides a reliable income stream, helping beneficiaries with budgeting and reducing the risk of rapid expenditure.
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Lifetime income
Once this is set up, you typically cannot change the payment or take additional withdrawals. Lifetime income is often referred to as "life-only payments" and is one of the most common settlement options offered by insurers. It is important to note that the interest earned or paid out as part of a lifetime income option is taxable as regular income when received.
A key feature of lifetime income is that it provides a guaranteed income stream, ensuring financial stability for beneficiaries. This can be especially beneficial for those who depend on the income provided by the deceased and need a consistent source of funds to maintain their standard of living.
Additionally, lifetime income can help with budgeting and reducing the risk of spending the entire death benefit too quickly. This option allows beneficiaries to receive a steady income without worrying about managing a large sum of money at once.
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Life income with period certain
This type of annuity is also known as a period-certain annuity. The annuitant must purchase it before receiving payments, either through a lump sum or periodic payments made over their working life.
When choosing a life income with period certain option, the insurance company will pay out income for the entirety of the insured person's life or the period certain, whichever is longer. For example, if the period certain is 10 years and the insured dies after five, the beneficiary will receive payments for another five years. However, if the insured dies before the end of the period certain, the beneficiary may not receive the full amount of the initial benefit.
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Frequently asked questions
A life settlement is the sale of an existing insurance policy to a third party for a one-time cash payment. The payment is more than the surrender value but less than the actual death benefit. The purchaser becomes the policy's beneficiary and is responsible for premium payments.
Common options include a lump-sum payment, interest income, interest accumulation, fixed-period income, and lifetime income.
The life income with period certain option guarantees payments for the lifetime of the recipient. If the recipient passes away before the guaranteed period ends, payments will continue to a designated beneficiary.
Consider the financial needs and circumstances of the policyholder or beneficiaries. Also, think about tax implications and the expected lifespan of the recipient.
