Life Insurance settlement options

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

quiz

Question 1 Settlement options with a life contingency base payments on which of the following? the insurance company's declared dividend schedule a specific monthly payment amount selected by the owner or beneficiary a specific period selected by the owner or beneficiary *the beneficiary's lifespan The fixed amount option does not include a life contingency. Question 2 Life insurance settlement options are best described as which of the following? payment mandates under which a policyowner or beneficiary receives life insurance policy proceeds *payment alternatives only policyowners can choose to receive 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 Settlement options are payment alternatives a policyowner or beneficiary can choose to receive life insurance policy proceeds. Question 3 Under the settlement option that Gary and Fran chose for their father's life insurance, they receive monthly payments until the second payee (survivor) dies. At that point, income payments stop. What option have Gary and Fran chosen? life income with refund life income with period certain *joint and survivor life income straight life income settlement option Under the joint and survivor option, monthly payments are made to two payees until the second payee (survivor) dies. At that point, income payments stop, unless a period certain applies. No further payments are made to a contingent payee. Question 4 At the end of the interest-paying period (or upon request by the beneficiary), what happens to the annuity proceeds that the insurer was holding? The insurer pays the proceeds to the beneficiary. *The insurer pays the proceeds, either in a lump sum or under one of the other settlement options. The insurer keeps the interest, thus increasing the death benefit amount. The insurer pays the proceeds in a lump sum. At the end of the interest-paying period (or upon request by the beneficiary), the insurer pays the proceeds either in a lump sum or under one of the other settlement options. Question 1 Many payees worry about choosing the straight life income option because they know that if they die after receiving only a single income payment, the insurer makes no further payment. To address this concern, the insurance industry created which of the following? policy riders for disability settlement options guaranteeing that the amount of each payment is calculated so that the principal plus the interest earned reaches zero at the end of the selected period *life income settlement options guaranteeing that a certain minimum number of payments will be made or a specified minimum amount will be paid contingent beneficiary designations The industry created life income settlement options guaranteeing that a certain minimum number of payments will be made or a specified minimum amount will be paid, regardless of how short the payee's life is. Question 2 Which of the following best describes the present value of money? 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. 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 refers to the growth in the value of money, in general, not to any particular use of money. Question 3 Julie is the beneficiary of her husband's $150,000 life insurance policy. When he dies, Julie chooses to receive payments of about $800 a month, or $9,600 a year, which will continue as long as she lives, whether she lives past her life expectancy or dies before it. Payments are to cease when she dies, whenever that may occur. Julie has chosen which of the following settlement options? *straight life income settlement option life income with refund joint and survivor life income life income with period certain Under a joint and survivor life income payout, monthly payments are made to two payees until the second payee (survivor) dies. At that point, income payments stop, unless a period certain applies. No further payments are made to a contingent payee. Question 4 Under which of the following settlement options does the insurer distribute all the proceeds upon the death of the insured or surrender of the policy, with none held by the insurer? *lump-sum cash payment fixed period interest only fixed amount Under the fixed amount settlement option, the payee receives a fixed income for an unspecified period of time. The insurer holds the proceeds placed under this option. The insurer then pays out the proceeds (including interest) on a schedule until the principal is exhausted.

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.

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 --settlement option= Provisions in a life insurance policy or annuity that provide the payee with various ways to receive periodic payments of benefits

Key Points

-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. -With the fixed amount settlement option, the larger the periodic payment amount, the shorter the payout time period. -Life income settlement options share a common element: they involve income payments that the payee cannot outlive. -Of all the various types of life income options, the straight life option generally provides the largest payment amount to the payee. -Under the J&S option, monthly payments are made until the second payee (survivor) dies

Life Income with Period Certain Option

-settlement option with a life contingency under which a payee receives income payments for life. However, he or she is guaranteed that the payments will be made for specified term. 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

A life insurance policy's death benefit can be paid out or "settled" in many different ways at the death of the insured. These settlement options are specified in the policy. The policyowner can select the settlement option and, through the spendthrift clause, mandate that it not be changed by the beneficiary. Otherwise, the policyowner can let the beneficiary select the desired option. While the policy is in force, the policyowner may change the settlement option at any time. Proceeds from a life insurance policy can be paid out in a variety of ways. There are two categories of settlement options: 1. those without a life contingency 2. those with a life contingency --spendthrift clause= common clause in life insuarnce policies that states that creditors cannot claim any death proceeds from the policy before the proceeds are paid out to the beneficiary.

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.

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.)

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.

Single (Straight) Life Income Option

--life insurance settlement option with a life contingency under which the policy's proceeds are converted into payments that are made for the life of the payee. The payment stop upon his or her death. 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.

For the test

-All settlement options are actuarially equivalent (even though they are different, one may be more valuable than the other. the fact is to the insurance company they are mathematically or actuarially equivalent. What matters to the beneficiary and policy owner is what matters, determinate factor bc they are all the same.

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

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.

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: 1. installment refund option 2. 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