Choosing the right settlement option for your beneficiary is important, and there are several life insurance settlement options available. Here’s a breakdown of the most common settlement options:
| Settlement Option | Description | Advantages | Disadvantages |
|---|---|---|---|
| Lump-sum | Entire death benefit paid in a single transaction | Immediate access to the entire sum | May not be the best option if the beneficiary won’t manage a large payout responsibly |
| Life income | Converts the death benefit to fixed, regular annuity payments for the rest of the beneficiary’s life | Provides the beneficiary with a lifelong income stream | Agreements tend to be inflexible |
| Fixed income | Specifies a fixed amount of money each month until the death benefit and any cash value runs out | Prevents the beneficiary from spending the entire death benefit all at once | May be allowed to change the payment amount after the policyholder’s death |
| Fixed period | Shares the payments over a set period instead of guaranteeing a certain amount until the money runs out | Allows the policyholder to set the fixed period to end when the mortgage will be repaid | Payments may be lower than a life income settlement |
| Interest income | Retains the death benefit and invests it so that it earns interest. The interest is then paid to the beneficiary to provide a regular income | Provides a regular income while investing for future financial security | Beneficiary will have to pay tax on the interest earned |
| Interest accumulation | Insurer holds the death settlement on the beneficiary’s behalf and invests it, letting the cash value grow like a savings account | Beneficiary can withdraw funds when they need to | May achieve better growth by receiving a lump sum settlement and reinvesting the money elsewhere |
When the insured party dies, the beneficiary must submit a paper or online claim to receive the death benefit. They will need to provide copies of the policy document and death certificate. After the claim is processed, the insurer transfers the death benefit in a lump sum or in a series of payments depending on the settlement option chosen.
If you need access to money tied up in your life insurance policy, you could withdraw some of the cash value or take out a loan against it if you have an invested whole life policy. Alternatively, you could surrender the policy and receive a lump payment from the insurer, but this will likely be significantly lower than the amount you paid in. Alternatively, you could sell your policy for cash to a third party in a transaction known as a life settlement, which usually pays more than surrendering the policy. However, bear in mind that selling or surrendering your policy means you forfeit any death benefit for your beneficiaries and lose any remaining coverage.
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Article Sources
- Investopedia. What Are Your Life Insurance Settlement Options?
- Investopedia. 6 Life Insurance Settlement Options You Should Know
- Forbes. Settlement Options
- Government of Canada. Settlement Option - Definition - The Economic Times
- Wikipedia. Life Insurance Settlement Options