Life Insurance Settlement

A life insurance policy comes with the feature of helping your family with financial support after your death event. Life insurance settlement involves selling of life insurance policy to a person to get cash equivalent to the cash surrender value of the policy. The new owner of the policy will become the beneficiary and will get the death benefit of the policy after the death of the original policyholder. In this case, the policyholder will decide the structure or the method of death benefit payment but the beneficiary can change that structure later. In this post, now we will provide you with certain life insurance settlement options that would help you to make the correct choice regarding life insurance settlement.

Lumpsum payment option

This option appears to be the most common one in which the beneficiary will get the whole death benefit in a single payment. It enables the beneficiary to pay his or her debt or to invest in any way without having to pay tax. But if the investment seems associated with earning then it would become taxable.

Interest accumulation option

In this option, the beneficiary can keep the death benefit with the insurance company or in any account through which they will get the interest in addition to the payment. The monetary value of the death benefit will increase with compound interest and the beneficiary can withdraw the funds whenever required either the entire amount or partial funds according to their convenience.

Interest-only option or interest income option

In this option, the insurance company keepsthe principal amount of the death benefit and the beneficiary receives the interest portion of the benefit that can be withdrawn partially or fully. This settlement option works well when the beneficiary needs a small amount of funds.

Fixed period option

In this option, life insurance settlement provides death benefit over a specified period of time. A beneficiary will get the payment along with interest. This kind of option seems effective for the beneficiary having fixed expenses like any debt clearance. Suppose a beneficiary pays $2,000 monthly payment of mortgage and has 12 years left on that mortgage, then a life settlement payment of $2,000 for 12 years will be beneficial for mortgage clearance.

Lifetime payment option

This option provides payment to the beneficiary throughout their lifetime. This ensures the beneficiary with a regular source of income and prevents the beneficiary from spending the whole amount of payment prematurely. The beneficiary cannot change the settlement method in this kind of option and cannot withdraw any extra amount of money.

Lifetime payment with a known period

This option is also called life only payment that provides funds till the death of the beneficiary. In this option insurance company will pay for the whole life or for the period certain.

Important points to remember –

  • The lump-sum payment option is suitable for trustworthy beneficiaries.
  • The interest earned in the settlement option is taxable as regular income.
  • The lifetime payment with a known period option may offer a small payment compare to the pure lifetime payment option.