Life Insurance Settlement Options

Proceeds from a life insurance policy can be paid out in a variety of ways. Which one of the following most correctly describes the two general categories of life insurance settlement options? fixed period and fixed amount straight life and survivorship period certain and refund those without a life contingency and those with a life contingency

those without a life contingency and those with a life contingency

joint and survivor with period certain

For those who want added assurance of guaranteed payments, it is possible to set up a joint and survivor settlement option that includes a period certain guarantee. This is most likely if both payees are elderly when joint and survivor payments begin. With this option, if both joint payees die before the end of the period certain, payments continue to the end of the period.

life income with period certain option

Under the life income with period certain settlement option, a payee receives income payments for life. However, payments are guaranteed for a specified term. For example, a life income with ten-year period certain provides payments to the payee for life. It also guarantees that those payments will be made for at least ten years. So, if the payee died six years after payments begin, then payments will continue to a contingent payee for the remaining four years of the term. If the payee lives beyond the guarantee period, payments will continue until his or her death. Any term can be selected. Common term certain periods are 5, 10, and 20 years.

Life insurance settlement options are best described as which of the following? payment alternatives only policyowners can choose to receive life insurance policy proceeds payment mandates under which a policyowner or beneficiary receives life insurance policy proceeds payment alternatives a policyowner or beneficiary can choose to receive life insurance policy proceeds payment alternatives which only beneficiaries can choose to receive life insurance policy proceeds

payment alternatives a policyowner or beneficiary can choose to receive life insurance policy proceeds

Interest-Only Payment Option

When the interest-only option is selected, the insurer holds the policy proceeds in an interest-bearing account until a future date selected by the beneficiary (or the policyowner) and pays out just the interest until then. The interest rate used with this option is the higher of a guaranteed rate specified in the policy or a current rate. Interest is paid at intervals of at least annually but no more often than monthly. (Most states have regulations as to how an interest-only settlement option is to be paid out in their jurisdictions.) At the end of the interest-paying period (or upon request by the beneficiary), the proceeds that have been held by the insurer are paid out, either in a lump sum or under one of the other settlement options.

fixed amount option

As with the fixed period option, the fixed amount settlement option distributes the death benefit through a series of payments to the beneficiary. With this option the policyowner or beneficiary designates the payment amount, and the time period depends on the size of the death benefit. With the fixed amount settlement option, the larger the periodic payment amount, the shorter the payout time period. Like the fixed period option, the fixed amount option distributes both the death benefit and interest earned on the funds held by the insurer during the distribution period. Payments can be made monthly, quarterly, semiannually, or annually.

Which statement about the interest-only life settlement option is NOT correct? The policy specifies the minimum interest rate. Though a policy guarantees a minimum interest rate, if the interest earned is more than the guaranteed minimum, the company pays the lower amount. When a policyowner selects the interest only option, the insurer holds the policy proceeds until a future date and pays the interest that those proceeds earn. The insurer pays interest at least annually but no more often than monthly.

Though a policy guarantees a minimum interest rate, if the interest earned is more than the guaranteed minimum, the company pays the lower amount.

Which of the following best describes the present value of money? Present value is the amount that a life insurance policy's cash value will grow to when the benefits are paid as a death benefit. Present value is the amount of money needed to provide lifetime income based on the payee's current age. Present value is the sum of money needed today to grow to a specified sum in the future, using a specified rate of interest. Present value is the amount of money paid to contingent beneficiaries if the primary beneficiary dies first.

Present value is the sum of money needed today to grow to a specified sum in the future, using a specified rate of interest.

joint and survivor life income option

Another popular settlement option is a joint and survivor (J&S) life income payout. Under the J&S option, monthly payments are made until the second payee (survivor) dies. At that point, income payments stop, unless a period certain also applies (though this is uncommon under the J&S option). Joint and survivor options can be set up to provide the survivor with a specified percentage of the payment both were receiving. The smaller the survivor's percentage, the larger the payment will be initially paid to the joint payees. The most common joint and survivor options are joint and 100 percent survivor, in which the payment continues unreduced upon the first payee's death; joint and two-thirds survivor, in which payments are reduced by one-third upon the first payee's death (with two-thirds continuing to the survivor); and joint and one-half survivor, in which payments are reduced by one-half upon the first payee's death. For example, a $200,000 death benefit might provide the following options to a couple: joint and 100 percent survivor: $1,000 per month to joint payees and $1,000 per month to surviving payee joint and two-thirds survivor: $1,200 per month to joint payees and $800 per month to surviving payee joint and one-half survivor: $1,400 per month to joint payees and $700 per month to surviving payee

life income with refund option

Like other life income settlement options, the life income with refund option provides income payments for the life of the payee. In this case, if the payee dies before receiving payments equal to the amount initially placed under this option, the remainder goes to a contingent payee in the form of a refund. Refunds are available under either of two options: installment refund option cash refund option Under the installment refund option, income payments continue to a contingent payee in the same amount as were paid to the primary beneficiary. They continue until total payments made equal the amount placed under the settlement option. Under the cash refund option, the contingent payee receives a lump-sum payment of any remaining balance.

Types of Settlement Options with a Life Contingency

In contrast to a settlement option without a life contingency, a settlement option with a life contingency is based on the lifespan of the payee. These settlement options are also known as life income settlement options. Life income settlement options share a common element: they involve income payments that the payee cannot outlive. In essence, the proceeds of the insurance policy are used to buy an immediate annuity on the payee's life. (Annuities are financial products that provide a stream of income payments for either a specified term of years or for life.) The payment amount is based on the payee's life expectancy, with longer life expectancies yielding smaller periodic payments. All other factors being equal, a younger beneficiary will receive smaller payments than an older beneficiary. On the other hand, the younger payee can expect payments to be made over a longer period of time than an older beneficiary. There are four lifetime income options: single (straight) life income life income with period certain life income with refund joint and survivor life income

single (straight) lifeincome option

The straight life income option is the least complicated of the life income settlement options. Under this option, the policy's proceeds are converted into an income stream that lasts the beneficiary's entire life. Payments cease at the beneficiary's death. For example, assume that Lydia is the beneficiary of her husband's $150,000 life insurance policy. At his death, if she were to elect a straight life income settlement option, she would receive payments of about $800 a month, or $9,600 a year. Those payments will continue as long as Lydia lives, whether she lives past her life expectancy or dies before it. No payment is made to any contingent payees at the primary payee's death. Of all the various types of life income options, the straight life option generally provides the largest payment amount to the payee. That is because payments cease when the payee dies, no matter how soon that may be after payments have begun. The absence of payment guarantees translates into a higher payment than would be the case if there were a payment guarantee. Beneficiaries who are concerned by this usually elect a life income option that includes some form of payout guarantee. These options are discussed next.

Lump-Sum Cash Payment Option

A cash payment of policy proceeds is often referred to as a lump-sum cash payment. Under this payment method, the beneficiary receives the death benefit proceeds in the form of a single payment. All proceeds are distributed at once upon the death of the insured. Upon a lump-sum cash payment, the insurer has fulfilled its responsibilities

Retained Asset Account

A growing number of life insurance companies make payments through a retained assets or beneficiary access account. In this case, the company provides the beneficiary with a checkbook that can be used to withdraw funds from the life insurance proceeds that are held in the retained assets account. There are no restrictions on the use of this money. These funds earn interest while they are in the account.

Types of Settlement Options Without a Life Contingency

A settlement option without a life contingency is one whose payment is not determined or affected by the life (or death) of the person receiving the income payment. In this category, there are four settlement options: lump-sum cash payment interest-only payment payments for a fixed period payments of a fixed amount

fixed period option

Under a fixed period settlement option, the death benefit is paid in equal installments over a period of time selected by the beneficiary or policyowner. Payments consist partly of death benefit proceeds and partly of interest earned on the undistributed funds remaining with the insurer. The amount of each payment is calculated so that the principal plus the interest earned reaches zero at the end of the selected period. Payments can be made monthly, quarterly, semiannually, or annually. For example, a five-year payout period for a $100,000 death benefit would produce monthly payments of $1,667 ($100,000 ÷ 60 months = $1,667) plus interest. The payee's mortality does not affect the amount or duration of payments under this option. If the payee dies before the selected period ends, payments continue to the contingent beneficiary until the end of the period. The contingent payee can choose to receive a lump sum equal to the present value of the final payments. (Present value is the value today of a future sum of money—either a lump sum or a stream of payments—discounted at an interest rate.)