What are your Death Benefit Payout Options?
The death benefit options, also referred to as life insurance policy settlement options, refer to the manner in which life insurance policy proceeds are contractually paid out to the named beneficiary (or multiple beneficiaries) following a death benefit claim. With regard to life insurance, there are a number of different settlement options that are available to the policy’s named beneficiary for payout of the proceeds. The most common choice – and typically the easiest – for most beneficiaries is the lump sum payout. This occurs when the beneficiary receives the entire amount of the death benefit (or face amount) proceeds all in one single lump sum.
Oftentimes, a life insurance beneficiary will be in need of a large amount of funds for the purpose of paying for the insured’s funeral costs such as the ceremony and burial expenses, final medical bills, and other unpaid debts such as a mortgage and / or credit card balances. These funds may also be used to replace the decedent’s income so that his or her survivors can continue to pay for their ongoing living expenses.
There are other life insurance settlement options as well, including a wide array of installment payments with various durations. Often, the installment payout option that is chosen by the beneficiary can be set up to pay the benefit proceeds from the policy over the entire life of the beneficiary.
Some of the installment payout options that are available to life insurance beneficiaries can include the following:
- Interest income options
- Fixed period option
- Fixed amount option
- Life income option
- Specific income option
- Joint and survivor life income annuitization option
Regardless of whether the proceeds of a life insurance policy are taken as a lump sum or as one of the installment options, these proceeds are typically free of federal income taxation to the beneficiary.