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Life Insurance Settlement Options

Life Insurance board with related terms

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

Table of Contents

There are two main parts to any life insurance policy. The person who bought the plan, and the person who’s going to receive the payout from the policy, also called the beneficiary.

The way the money is paid to the beneficiary is called the settlement.

Understanding Life Insurance Settlement Options

The most common way a settlement is handled is through a lump sum. With the lump sum, the whole amount is paid in one single check.

For most people, a lump sum is the best option because it will give them the money they need to pay off any of the expenses, like mortgage or funeral fees. If you (or the beneficiary) don’t want to receive the money all at once, then there are several other settlement choices:

Interest Income Option

With this choice, the insurance company keeps the funds and will pay a pre-determined amount of interest on the money. The interest will pay paid out to you every month, quarter, semi-annually, or annually. You can still withdraw some of the money if you need.

This could be a good choice for those who do not need the life insurance proceeds until a later date. For example, the funds could be used for a child’s future college education costs several years in the future.

Life Income Option

This choice works similar to an annuity. This option allows you to get a guaranteed portion for the rest of the beneficiary’s life.

The amount is based on the face value of the life insurance plan, as well as how old the beneficiary is when they start paying out the plan.

Joint And Survivor Life Income Annuity Option

This choice is similar to the Life Income Option above, except the payments are going to be based on more than one person’s life.

Basically, instead of the insurance company determining how much you’ll get paid based on your life expectancy, they are going to use the expected lifespan of the person who they assume will live longer.

Specific Income Option

People who pick the Specific Income Option are going to get a pre-set amount of money every year until the whole plan has been paid out.

If the beneficiary were to pass away before the whole policy was paid, then the secondary beneficiary getting the money.

Fixed Period And Fixed Amount Options

This choice is a combination of the settlement options above. It will pay the pre-determined amount as well as the interest over a set amount of years.

Just like with the other choices, if the beneficiary were to die, then the rest of the money will be pass on to the secondary beneficiary.

The fixed amount settle lets you get the fixed payments, but you can increase or decrease the size of the payment. If you want a little bit of flexibility, this could be a good option.

The Bottom Line

When it comes to distributing the proceeds from a life insurance policy you have plenty of choices. Therefore, it is typically best to discuss which method would work best with a professional who is in the life insurance field. That way, you can be assured that you understand how each option works and which would work best in your particular situation.

In any case, regardless of whether the proceeds are taken as one lump sum or as an installment, the principal amount of the life insurance proceeds is typically free to the beneficiary from federal income taxation.

Planning Before The Settlement

Getting the settlement from the insurance policy is only half of the battle. You need the best kind of life insurance for your family, so once the time comes to get the payout from the plan, your family has the money that they need.

Here are a few things to look at before you decide.

Choosing a Policy

There are two different kinds of plans that you’ll need to choose from, permanent coverage or temporary life insurance policy.

In 99% of cases, we recommend a term insurance plan. They are bought with a pre-determined expiration date on them. Because these policies are only effective for a certain time period, they are going to be cheaper.

How Much Coverage Do You Need?

One factor which will determine how expensive your plan is the amount of coverage are you buying. Do you know how much your family will need? Let’s walk through the process.

To start, let’s comb through your debts. If you were to pass away, all of your bills would be passed on to your family members, which can make an emotional situation a thousand times worse.

Some of the biggest expenses that you’ll leave to your family are your mortgage, student loans, and car payments. Make sure that your life insurance is large enough for the settlement to pay off those bills without giving your loved ones any financial strain. There are companies who offer final expense life insurance to cover some of your expenses.

The next factor that you need to consider for the size of your life insurance coverage is your salary. If you’re the main bread-winner, they would no longer have the money they rely on. Add your income into the calculations.

An Experienced Agent Can Help

We have years of experience helping clients through the process.

It’s our mission to ensure that your family has the life insurance protection that they deserve without breaking your bank every month. Because you can’t predict the future, don’t wait another second to start the process.

Thinking about your debts or your passing isn’t fun. We know that, but it’s one of the core decisions you should make. Our agents can help you compare the advantages of each plan and find the perfect company for you and your needs. Perhaps you’re wondering what is the best life insurance available to me?

Let us answer what questions you have and help you get the coverage that suits your individual needs.

Call us today for a quote at 1-800-712-8519.

Picture of Doug Mitchell, CLU

Doug Mitchell, CLU

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent close to 30 years in the life insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health. Some other notable items about Doug: Top of the Table Million Dollar Round Table member (MDRT). (MDRT is a global, independent association of the world’s leading life insurance advisors) | Premier Partner with Lincoln Financial and Cabinet Member | Served two years as President of the Auburn/Opelika Association of Financial Advisors | Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award | New York Life, Executive Council Member | Currently serves as President of Ogletree Financial, a life insurance General Agency. | Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

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