When someone takes out life insurance to ensure their children and family will be cared for, it is essential to understand all the complexities and nuances to determine which life insurance settlement option will best provide for those loved ones in the future while still fitting the individual’s current financial situation and needs. If you need legal guidance you can rely on, consider contacting the experienced estate planning attorneys at Van Rock Law for a free consultation. Schedule today when you call our office at (866) 720-0195.
How Life Insurance Benefits Work
According to the United States Office of Personnel Management, when an individual purchases life insurance, they are planning ahead to ensure that their beneficiaries will receive life insurance benefits upon their own death. Such benefits can then be used to cover essential expenses, such as outstanding debts, medical expenses, funeral and burial costs, and more. The person assigned as one’s designated beneficiary will receive these death benefits when upon the policyholder’s death. However, the person who takes out a life insurance policy must still determine how their beneficiaries will receive death benefits. Choosing the life insurance settlement option that will best provide for one’s intended beneficiary can be a complex process, with many factors to consider. The estate planning attorneys at Von Rock Law often advise our clients on which settlement options may be best for their needs and goals. Some factors that could impact this decision include:
- The type of life insurance policy purchased
- The details of the life insurance policy
- The policyholder’s financial goals
With that in mind, here are some common types of settlement options, each of which has its potential attractions for anyone interested in setting their beneficiaries up for future financial success.
Life Insurance Settlement Options
Before making the decision to purchase life insurance, it is crucial to thoroughly investigate the available policies and the various ways of arrangement settlements. Otherwise, one may not fully understand how the policy works or how beneficiaries will receive their proceeds when the policyholder passes away.
Here are some of the most widely available life insurance settlement options to choose from:
Lump Sum Payments
One of the most popular life insurance settlement options is lump sum payouts. These are generally the most straightforward type of settlement option, as they allow beneficiaries to obtain the total value of the life insurance policy in a single payment. This is a tax-free payment with no restrictions. Beneficiaries can use the death benefits to cover debts, spend as they wish, or invest.
However, if the beneficiary uses their lump-sum payment to invest, any capital gains earned from the investment opportunities may be considered taxable income and subject to penalties. Lump-sum payments are generally ideal for those who need access to settlement funds quickly and are responsible with money. If you are worried about how your beneficiaries will spend their life insurance death benefits, considering alternative settlement options may be in their best interests.
Lifetime Income Payments
Lifetime income payments are ideal for anyone who wants to provide their beneficiaries with enough money to cover daily living costs well into retirement. This means your beneficiaries will have a guaranteed income stream for the rest of their lives. This is one of the most common life insurance settlement options nationwide.
Lifetime income payments are frequently called life annuities. Beneficiaries will not be able to switch to a different settlement option if the policyholder initially chooses lifetime income payments. The policy beneficiaries will also be barred from making additional withdrawals if they run into financial hardship and require economic support. This means younger beneficiaries will get a smaller amount per payment over a more extended period while older beneficiaries will get a more considerable amount with each payment over a shorter period.
Interest Accumulation Payments
In an interest accumulation settlement, beneficiaries will receive a lump sum payment of the interest that has accumulated since the start of your policy. Then, the remaining payments will be regularly disbursed, including the principal balance and additional interest. This way, beneficiaries will still receive regular payments but also have a chance to take advantage of the interest the policy has accrued over time.
Those who choose to go with interest accumulation settlements need to be prepared. The insurance company can hold onto the benefits indefinitely on behalf of the beneficiaries. Then, when the policyholder passes away, the beneficiaries can access benefits, but will first need to file a withdrawal request with the insurance company. This is often a preferred option for anyone with beneficiaries who cannot be trusted to be financially responsible.
More About Interest-Only Payments
Unfortunately, interest-only payments are not without drawbacks. Here, the policyholder’s beneficiaries are barred from accessing their benefits until they request a withdrawal from the life insurance provider. The idea is that doing so means beneficiaries may be less likely to be irresponsible with their life insurance proceeds. Interest-only settlements are designed to provide beneficiaries with a consistent stream of income for the foreseeable future.
Policyholders must trust that their beneficiaries are financially stable and leave the principal amount in the account so it can be invested. This way, it will continue to grow over time. Interest accumulation payments may be an ideal life insurance settlement option for policyholders with beneficiaries who lack financial experience, whether because they are minors or for some other reason. Policyholders who are still not sure if interest-only payments will help their families reach their financial goals can contact Von Rock Law to discuss their concerns in further detail.
Fixed Period Payments
The Internal Revenue Service (IRS) explains that fixed period payments are benefits and earned interest that remain with the insurance company. Then, the insurer is responsible for distributing the payments to beneficiaries until the account is paid out in full. Generally, these payments are made over a period of five years or less. Fixed period payments are typically considered tax-free income.
Beneficiaries often use the payments they receive during the established period to cover their daily living expenses. Fixed period payments should provide beneficiaries with guaranteed income for the lifetime of the policy. These benefits can then be used to invest and generate more income. One of the most significant benefits of fixed period payments is the option of decreasing or increasing the amount paid out in installments, which gives beneficiaries more control over their settlement funds than they enjoy with some other settlement options.
Get Help Choosing the Right Life Insurance Settlement Option
The variety of options and the emotional stakes involved can make choosing a settlement option for your life insurance policy a challenging process. Many people considering life insurance plans find it helpful to consult with an experienced estate planning attorney who can help them evaluate which life insurance settlement option is best. If you are reviewing life insurance options as part of your total estate plan, consider contacting the dedicated team at Von Rock Law for a confidential consultation. You can reach us by phone at (866) 720-0195 or through our online contact form when you have questions or concerns about how life insurance works and which settlement option will best provide for your family’s needs.