What Are the Settlement Options Available When Claiming Life Insurance Benefits?

 One of the common questions that life insurance policyholders ask is “How will I get my insurance money after maturity?” or “How do I settle my insurance claim amount?” Both questions are more or less the same. 

Do you have similar questions on how to settle your policy amount during the claim time of your whole life insurance? There are a few options available which will be discussed in this post. 

Generally, the policyholder chooses one of the options for settling the claim amount, but the survivor or beneficiary can also change the option when claiming it. On certain occasions, the chosen settlement option by the policyholder stands unalterable and the insurance company will pay the death benefit to the beneficiary through the default option the insurer selected.

You Can Choose from These Four Available Options

  1. Lump-Sum Settlement

Paying the death benefit as a lump sum amount is one of the frequently used options, which is generally the default option. In this case, the policyholder chooses to pay the beneficiary a lump sum death benefit. 

The beneficiary will get the total survivor benefit as a lump sum payment. Post-payment of the death benefit, the beneficiary will not have any financial transaction with the insurance company in the future. 

  1. Specified Number of Years

A policyholder can select the option of paying the survivor benefit to the beneficiary over a specific period, generally over several years.  

For example, the policyholder may want the survivor to receive the benefit over a period of 15 years. Upon the passing away of the insured, the insurance company will split the total benefit into equal monthly amounts over the next 15 years and thus pay the beneficiary. 

  1. Specific Amount

In this option, the policyholder can choose a certain amount payable to the beneficiary annually. The insurance company will pay this amount to the beneficiary every year (or through monthly payments) until the total survivor benefit comes down to zero.  

  1. Interest Only

An interest-only settlement is a less common option. In this option, the insurance company only pays the interest amount to the beneficiary. It means the beneficiary will get payments on the accrued interest from the death benefit amount. The principal amount will stay at the insurance company. In such cases, the policy owner would want to pay only the accrued interests to the beneficiary for a specific period. Eventually, the insurer will allow the beneficiary to receive the principal survivor benefit amount. 

Read Also: Pandemic-Affected Home and Business Owners are now facing the Brunt of Wildfires and Extreme Weather

Tax Consequences of the Settlement Options

Generally, the beneficiary does not have to pay tax on the life insurance death benefit.  However, the interest that the beneficiary will receive on the survivor benefit is taxable as regular income. 

A beneficiary may earn interest on the death benefit in the following ways:

In Case of a Lump Sum Amount: For the single payment or lump sum option, a beneficiary may potentially earn interest on the principal survivor benefit amount if the insurance company delays processing.   

If the beneficiary does not receive the total survivor benefit from the insurance company within a specified timeframe (for example, within a month), the beneficiary is supposed to receive interest on the amount.  

Additionally, the insurance company will also owe the beneficiary interest if the beneficiary could not file the claim right after the policyholder’s death. In this case, the beneficiary will receive interest for the time elapsed between the insured’s death and the filing of the claim.

In Case of a Specific Number of Years: In this case, if the beneficiary does not receive the survivor benefit over a certain number of years, he/she is likely to receive interest for the missed payment period. Generally, this interest adds up to the remaining or outstanding amount payable to the beneficiary. However, the beneficiary will have to pay taxes on interest received. 

In Case of a Specific Amount: For this settlement option, the beneficiary will receive interest on the amount that remains with the insurance company. Here too, the interest generally adds up to the outstanding amount and the beneficiary will be paying taxes when he/she receives the interest payment.

In Case of Interest-Only Option: Lastly, when it comes to an interest-only option, the total amount that the beneficiary receives will be taxable, as the entire survivor benefit amount comprises interest earnings only. 

Before We Go

If you have questions about life insurance or are looking to enroll in one, our experts can assist you.

Give us a call at our toll-free number 1-888-505-7988 or fill out the online contact form and we will be glad to assist you.


Popular Posts