Life Insurance Policy Distribution and Payment Options
Life insurance contracts offer a number of policy options which give insureds and 
beneficiaries the opportunity to make choices that affect how certain features of the policy will apply. This creates a degree of flexibility in the ways in which life insurance products may be used to meet the specific needs of a particular individual or family.
The major types of life insurance policy options include settlement options, nonforfeiture options, and dividend options. Request a FREE Life Insurance Quote
Settlement Options of Life Insurance
Settlement options are available under all types of life insurance. Settlement options refer to the various ways that the policy proceeds can be paid other than in a lump sum. The purpose for which the insurance was originally purchased and the situation at the time the benefits are to be received often dictate the most appropriate method of settlement.
Electing an Option
The policy owner can elect a settlement option before the insured's death. If the policyowner has not selected a settlement option the Beneficiary has the right to select the method of payment after the death occurs. The purpose of the insurance often dictates the most appropriate mode of settlement.
The same options are available whether the proceeds are being distributed to an insured or at retirement or maturity to a beneficiary at the insured's death. Generally, the following optional modes of settlement are available:
- Lump sum (default).
- Interest only.
- Fixed-period installments.
- Fixed-amount installments.
- Life income.
- Joint and survivor.
- Any other method approved by the insure
In addition, most companies will agree to distribute the proceeds under any reasonable and actuarially sound mode. Request a FREE Life Insurance Quote
Lump Sum (Default Mode)
Life insurance proceeds may be paid as a lump sum. It is the method of settlement when no other method has been elected — the default mode.
There may be occasions when a lump sum settlement is ideal, such as when the proceeds are intended to pay off a specific obligation, or when a designated beneficiary is highly skilled in handling and managing money. But in many cases, other options may be more appropriate.
Interest Only
Under this form of settlement, the proceeds are held by the insurance company and the interest earned on the proceeds is paid to the beneficiary, at least annually. The rate of interest paid is stated in the policy. The interest option is appropriate when the funds will not be needed until a later date.
This option might also be ideal when there is a need to provide a continuing income for a long period of time and/or when the beneficiary is unable to handle large sums of money, as in the case of minors or elderly persons. Request a FREE Life Insurance Quote
Several conditions may be elected in connected with the interest only option. A policyowner might specify:
- That the proceeds will remain on an interest only basis for a stated period of time, and the remainder paid in cash or under one of the other settlement options.
- That no part of the principal is ever to be paid to the beneficiary, but will be paid to a contingent beneficiary upon the death of the primary beneficiary.
- That the beneficiary may withdraw the principal, in whole or in part, or elect another settlement option, at any time.
Fixed-Period Installments
Under this option, the proceeds are retained by the insurance company and paid out in equal installments over a specified period of months or years. The payments are comprised of both principal and interest, and are designed to exhaust the principal at the end of the installment period.
The fixed-period option is appropriate when income is needed over some fixed period, such as income during the readjustment, dependency, or black-out periods.
The advantages of this method of payment are that the payment period is guaranteed, and payments will continue even if the primary beneficiary dies. The disadvantages of this method are that the beneficiary(ies) may outlive the payment period, in which case benefits are exhausted and all payments stop, and the survivors might not have developed alternative sources of income during the transition period. Additionally, the amount of the periodic payments may not provide an adequate income for survivors. Request a FREE Life Insurance Quote
