At the death of the insured, unless another arrangement has been made, the
insurance proceeds will be paid to the beneficiary in a lump sum. However, life
insurance policies usually give the policyholder (or the beneficiary) the right
to choose non-lump sum payouts, known as settlement options. There are five
common types of settlement options:
- Interest only: the beneficiary receives interest on the proceeds
held by the insurance company. The policyholder may provide for someone
(known as a contingent beneficiary) to take the proceeds at the first
beneficiary's death. Or the initial beneficiary may be given the right to
withdraw some or all of the proceeds in a lump sum from the insurance
- Fixed period payments: the beneficiary will periodically receive as
much money as the proceeds will "buy" for a specific time period.
For example, the beneficiary might receive a specified amount each month for
- Fixed amount payments: the beneficiary will periodically receive a
specified amount until the proceeds are exhausted.
- Life income (annuity): the beneficiary will periodically receive a
certain monthly payment for his or her lifetime. The amount of this payment
will be determined by the amount of the proceeds and the life expectancy of
the beneficiary at the time of the insured's death.
- Joint and survivor life income (annuity): the beneficiary will
periodically receive a payment for life. Thereafter, his or her spouse
receives periodic payments for life. Under this option, the amount that the
surviving spouse will receive is sometimes reduced to one-half or two-thirds
of the amount that first beneficiary's received.
Although insurance companies have touted settlement options as "a poor
man's trust," the insurance agents we have talked to are almost unanimous
in this advice: "take the cash." The unstated assumption here is that
in computing amounts to be received under settlement options, the insurance
companies use interest rate assumptions that aren't particularly favorable to