The settlement method you select for your insurance policy should be based on an understanding of all the available benefit options, and the reason or reasons that were the basis for your decision to purchase a policy. Settlement options include receiving a lump sum cash payment, receiving interest income, receiving a fixed payment for a specified period, or even receiving a pre-death cash payment. The settlement method you select may help your surviving family members have the necessary resources to continue making a comfortable living.
Term Life Settlement Options
There are two primary forms of life insurance: term life and whole life. The scheduled death benefit for level term policies remains constant for the life of the policy. The scheduled death benefit for a decreasing term policy decreases by a set amount each year the policy is in force. The death benefit for increasing term policies increases each year by a set percentage, or increases according to the annual rate of inflation.
Lump-Sum Cash Settlement
At the death of a policyholder, the insurance company must pay the full amount of the scheduled benefit within two months. Lump sum cash settlements are not subject to state or federal taxation. After the insurance company makes the lump sum payout, no further benefits remain for the policy.
Income for Life Settlement
At the death of the policyholder, the insurance company will determine the beneficiary’s life expectancy by the individual’s age and gender. The insurance company will calculate a monthly benefit based on the policy's scheduled benefit and the life expectancy of the beneficiary. If the beneficiary dies earlier than expected, the insurance company retains all remaining unpaid benefits.
Income for Life with Certain Period Settlement
If the beneficiaries do want to take a chance on the insurance company retaining unpaid benefits, the life option with certain period may provide a better option. The policy would pay out lifetime benefits based on a certain period such as five, 10 or 20 years. If the first beneficiary dies before the end of the established period, the remaining benefits go to a second beneficiary until the end of the guaranteed benefit payment period. It is important to remember that in both of the life settlement options the monthly payout will be at a fixed amount.
Whole Life Settlement Options
Unlike term life insurance, whole life insurance policies are permanent policies that remain in force as long as the policyholder pays premiums on time each month. Additionally, whole life policies accrue interest, providing an investment component to each policy. Since these policies accrue interest, it is possible to borrow money from the policy when sufficient value accrues. The previously discussed options such as lump sum and income for life settlements also apply to a whole life policy.
Viatical Insurance Settlement
If you become terminally ill and need cash to settle your affairs prior to your death, a viatical settlement broker may purchase the value in your whole life policy at less than the full scheduled death benefit amount. The viatical settlement broker continues to make the premium payments, with the expectation of receiving the full death benefit at the death of the original policyholder.
Single Payment and Limited Payment Whole Life Policies
Single payment policies have a large single payment at the issue date of the policy. Limited payment policies feature larger than normal premiums early in the policy period. Both of these two policy types are paid-up insurance, and require no further premium payments for the life of the policy. These policies offer all of the same settlement options as other term life and whole policies.
Income for Life Settlement with Variable Benefit Payments
Life insurance policies that function as an annuity may pay out a different benefit amount each month or other payment period. Factors that affect benefit payments include the interest rate the policy is earning, any current premium payments the policyholder is making, and outstanding loans against the policy. Policyholders must take into consideration the possible tax considerations of whole life policies that are accruing interest. State and federal tax requirements will affect benefit amounts.
Kenneth Oster's leadership experience includes an Air Force career, pastoral leadership, and business ownership in the automotive repair industry. He has a MBA from Western Governors University, and is working toward a DBA degree from Northcentral University. Oster authored the book, "The Complete Guide to Preserving Meat, Fish and Game: Step-by-Step Instructions to Freezing, Canning, Curing and Smoking."