Policy proceeds of life insurance are paid by a procedure called settlement. It may be paid out in five different ways and the settlement method can be selected by the beneficiary or the insurer. In some circumstances, the policyholder may be paid cash value of the policy before death.
The option of lump sum cash payment is the policy claim paid in full at once. After the insured’s death, it may be few weeks or more before the claim is paid to the beneficiaries. In such a situation, the earned interest completely depends on the face value during this period of time and also paid to the beneficiaries.
If you don’t need insurance proceeds right away, then interest income option is really good. The insurance company keeps the whole amount and pays the minimum interest rate to the beneficiary on the amount.
As per the policy terms, the contract may offer the beneficiary with withdrawal rights or the right to select another option of settlement.
The fixed period option pays off principal and interest over a fixed time span. If the beneficiary passes away before getting all payments, then the remaining amount becomes a part of the beneficiary’s property or to the contingent beneficiaries if one is named. The amount of payment is calculated by considering facts like policy amount, the span of the payment period and the interest earned. The beneficiary can withdraw all the money but withdrawing some amount in an option of a fixed period is not allowed.
The option of fixed amount pays a certain amount until the principal as well as interest completely paid. This option is flexible and allows the beneficiary to change the payment amounts or select another settlement option. The beneficiary is eligible to withdraw some part or the whole amount at a time. The payments may be planned using the fixed amount option so that the payment amount increases during a specific period of time.
Life income settlement option is a single premium annuity and offers the beneficiary with lifetime income. The payment amount is totally based on the insurance amount and the beneficiary’s anticipated lifespan. Generally, this option is preferred by older beneficiaries.