What Are Settlement Options?
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UPDATED: Sep 15, 2020
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Most life insurance policies provide several “settlement options” as alternatives to the lump sum payment. Lump sum payments are made in one of two forms, sometimes depending on the insurance company, the type of policy, and the amount being paid to the beneficiary.
Historically life insurance companies made lump sum payments by mailing the beneficiary a single check. Since 1984 an increasing number of companies have made many lump sum payments by what most experts agree is a far preferable method, through what is known as a retained assets or beneficiary access account. The life insurance company sends the beneficiary “a checkbook” that she can use to write checks against the life insurance proceeds that are deposited into the retained assets account. The funds all earn interest for the beneficiary from the date the claim is paid until the last dollar is withdrawn from the account. (Typically the beneficiary will even receive a small check for any extra interest that was earned before the last check cleared.)
The traditional settlement options (in addition to a lump sum payment (by means of a single check or the checkbook instead of a check) that beneficiaries may elect include:
- The insurance company can hold the proceeds at a interest. In other words, the insurance company will pay the beneficiary a fixed rate of interest on the proceeds, much like on a certificate of deposit. The insurance company’s rate is often is significantly higher than is available on bank CDs, so it makes sense to check with the insurance company paying the benefits. To withdraw the funds the beneficiary typically can write to the company, but that process is more involved than simply writing a check from the retained assets account.
- The insurance company can make equal monthly payments, which will include interest, for a period of years the beneficiary selects. The longer the period that is selected, the smaller the payment.
- The insurance company can issue a settlement option annuity that will make payments to the beneficiary for his or her life. Sometimes the settlement option annuity will also provide guarantees that payments will continue to be paid for a certain period to the beneficiary’s own named beneficiary, even if the original beneficiary dies.
As many life insurance policies were written years ago, when prevailing interest rates were much higher that became commonplace in the aftermath of the financial crisis of 2008, some older policies contain interest rate guarantees or base annuity payments using assumptions involving much higher interest rates than may currently be available.