Understanding Life Insurance Settlement Options

life insuranceWhen the insured on a life insurance policy passes away, the named beneficiary (or beneficiaries) is entitled to the death benefit proceeds. Within the life insurance policy contract, the insurance settlement options refer to the manner in which these funds may be paid out to the beneficiary. Typically, there are several different settlement options that are available.

In many instances, beneficiaries will choose the lump sum payout. This occurs when the entire amount of the proceeds are paid out at one time in a single payment. Going with this option can oftentimes help the beneficiary in paying off large expenses such as funeral and burial costs, as well as other final debts of the deceased. These funds may also be used to replace the decedent’s income in helping survivors to pay ongoing living expenses going forward.

If beneficiaries would prefer not to receive the entire amount of the death benefit proceeds all at one time, there are other settlement options that may be chosen. Some of the most common of these can include:

Interest Income Option

With the interest income option, the insurance company retains the funds and pays a stated amount of interest on the money. This interest may be paid out on a monthly, quarterly, semi-annual, or annual basis. When choosing this option, the beneficiary may have the ability to withdraw part or all of the proceeds when desired.

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

Life Income Option

The life income option is similar to an annuity. When choosing this life insurance settlement option, the policy beneficiary will be guaranteed to receive an income for the remainder of his or her life – regardless of how long that may be. The actual amount of that income, however, will be dependent upon the amount of the policy’s death benefit, as well as the age and gender of the beneficiary, as these are factor’s in the income recipient’s life expectancy.

Joint And Survivor Life Income Annuity Option

With the joint and survivor life income annuity settlement option, the beneficiary will be allowed to annuitize the death benefit proceeds payments based upon two or more individuals’ lives.

This means that the payments will be based upon the amount of death benefit proceeds, as well as the life expectancy of the beneficiary who is expected to live longer. The payment of the proceeds will therefore continue to pass from one beneficiary to the other until the last beneficiary has passed away.

Specific Income Option

If the beneficiary chooses the specific income option, he or she will receive an equal amount of income each year for a certain number of years until all of the death benefit proceeds have been paid out to them.

With this policy settlement option, if the beneficiary passes away before all of the income has been received, another individual can be chosen to receive the remainder of the payments until all proceeds have been paid out.

Fixed Period And Fixed Amount Options

The fixed period option will pay both an amount of principal and interest to the beneficiary over a certain stated period of time. Should the policy’s primary beneficiary pass away before the entire amount of the policy’s proceeds have been paid out, then the remainder of the money will be paid to the contingent beneficiary that was named in the policy.

With the fixed amount settlement option, the proceeds will be paid out in a fixed amount over time until both the principal and the interest have been completely paid out to the policy’s beneficiary. When using this particular option, the payment recipient has the ability to either increase or decrease the amount of payment – and if they choose, they could also even change over to a different settlement option altogether.

The Bottom Line

When it comes to distributing the proceeds from a life insurance policy, there are many options to choose from. 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. It’s vital that you’re getting 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. There are dozens of different factors that you’ll need to consider when you’re looking to get the best insurance plan to fit your family needs.

There are two different kinds of plans that you’ll need to choose from, a whole life insurance plan a term life insurance policy. Each kind of policy has its own advantages and disadvantages that you’ll need to weight based on your life insurance needs.

The most popular form of life insurance coverage is a term insurance plan, these plans are bought with a pre-determined expiration date on them. Once that date has passed, you’ll no longer have life insurance coverage and you’ll have to reapply for a new policy. Because these policies are only effective for a certain time period, they are going to be much more affordable than a whole life insurance plan, which is a form of permanent insurance.

Aside from getting the right kind of policy, it’s vital that you purchase enough coverage for your loved ones. Without enough life insurance, you could leave them with additional debts that they don’t have the money to pay off. There are several different factors to consider when calculating your life insurance needs.

The first thing that you should look at is your final expenses and any debts that you would leave behind to your loved ones after you passed away. If something tragic were to happen to you, 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.

The next factor that you need to consider for the size of your life insurance coverage is your annual salary. The second goal of your life insurance is to replace your paycheck if you were to pass away. If you’re one of the primary income earners in your home, your family would struggle to pay for basic expenses if something happened to you. Having quality insurance gives your loved ones the money that they need to replace that source of income without having to sacrifice their standard of living.

It’s important to get the correct amount of life insurance without getting more than you need. One of the biggest factors that is going to impact your monthly premiums is how much life insurance coverage that you purchase. If you have too much life insurance, you’re going to be spending too much money every month.

If you have any questions about your life insurance or about insurance settlement options, please contact one of our agents today and we would be happy to answer those questions and ensure that you’re getting the best plan to meet your needs. Our insurance agents have years of experience working with dozens of highly rated companies across the nation and can bring you all of the best rates for quality policies.

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, you shouldn’t wait any longer to get the best plan to meet your needs. You never know when something tragic is going to happen, which means that you shouldn’t wait another day to start the life insurance application process.

We know that finding the perfect life insurance plan can be a long and difficult process, but it doesn’t have to be. Our agents can help you compare the advantages of each plan and find the perfect company for you and your needs. Let us help you get several several quotes from some of the best life insurance companies available.

Call us today for a quote at 1-888-552-6159.

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Liran Hirschkorn is an independent life insurance agent. His mission is to help individuals across the U.S in finding the best rates on life insurance as well as helping those that have previously been declined get approved for coverage. Liran looks forward to speaking with you about your life insurance needs.

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