Settlement options are the choices that the life insurance beneficiary or policyholder has in determining how the death benefit payment will be structured. The owner may choose the option before death, or the beneficiary may select the option after the insured’s death. Each option’s appropriateness depends on the beneficiary’s financial situation.
The five settlement options are as follows:
- Lump sum. The death benefit may be received as a lump-sum cash settlement immediately after death.
- Interest income. The beneficiary can receive the annual interest earned from the death benefit. For example, the beneficiary would receive Rs 80,000 each year from a 10 lakhs death benefit earning 8 percent interest. The Rs 10 lakhs principal would remain intact and would continue to earn interest until the death of the beneficiary,
when it becomes part of his or her estate.
- Income of a specific amount. The beneficiary may receive a specific amount of income per year from the death benefit. Under this option, payments cease when the death benefit and interest are exhausted. For example, a Rs 10 lakhs death benefit earning 8 percent interest would provide a Rs 1.5 lakhs annual income for approximately
- Income for a specific period. The beneficiary may receive an income from the death benefit for a specific number of years. For example, a widow with small children may choose to receive an income for 18 years. The insurance company would calculate a level of income that would allow for equal proceeds each year, with all funds, including interest, being exhausted at the end of the 18th year.
- Income for life. The beneficiary may elect to receive an income for life. In such a case, the insurance company would use the life expectancy of the beneficiary to calculate the level of income that would allow for equal annual payments so that funds would be exhausted by the expected date of the beneficiary’s death. If the beneficiary
lives longer than expected, the income payments would continue.