Understanding Your Settlement Options For Life Insurance
Many people who have never had to claim the death benefit from a life insurance policy assume that a life insurance settlement and a lump-sum payout are essentially the same thing. Actually, however, there are several life insurance settlement options, and while lump-sum payouts remain in widespread use, there are a number of alternatives. Call Loughlin Law, P.A. to schedule a consultation and get help weighing your life insurance settlement options.
What Are the Settlement Options for Life Insurance?
Life insurance settlements are the payment arrangements for the death benefits paid to beneficiaries after a life insurance policyholder passes away. Note that it is important not to confuse these settlement options with life settlements, in which a life insurance policy is sold to a third party while the person originally insured under the policy is still living, according to FINRA. The handling of these life settlements can be especially complex in Florida, as, according to the Florida Bar Association (FBA), the state follows a somewhat atypical structure in how it categorizes this type of transaction in the state’s Insurance Code.
How Are Life Insurance Settlement Options Selected?
Most commonly, life insurance policyholders leave decisions about how life insurance settlements will be paid out to the beneficiaries they designate to receive these assets; many policyholders simply assume their loved ones will receive lump-sum payouts, as these are the most widely used of the various life insurance settlement options and many life insurance policies are intended primarily to provide loved ones with immediate access to resources during the expenses that often accompany a death in the family. However, some insurance plans offer the individual taking out a life insurance policy the option to review the life insurance settlement options and select one in advance for each beneficiary named in the policy. This advance-selection strategy can have advantages in certain situations. Understanding some of the most commonly applicable life insurance settlement options can be useful both to individuals taking out life insurance policies and to those seeking to claim their death benefits.
Lump-Sum Payouts
Lump-sum payments are the most common of the life insurance settlement options, perhaps because they are also the simplest. This model pays out each beneficiary’s full benefit in a single disbursement, generally as soon as the beneficiary has provided the insurance company with proof of both his or her own identity and the death of the policyholder.
If there are multiple primary beneficiaries named on the same life insurance policy, they do not all necessarily have to choose the lump-sum payment as their life insurance settlement option, but for practical reasons, it may make sense to specify the same life insurance settlement structure for all of them. Life insurance policies with multiple beneficiaries typically include terms specifying how the payout will be redistributed if any beneficiary has predeceased the policyholder or cannot be located, and making the necessary adjustments after payouts have already been received can trigger an additional round of paperwork, which most people prefer to avoid.
Benefits of Lump-Sum Life Insurance Settlement Options
The primary benefit of a lump-sum settlement life insurance payout is that the beneficiary receives the money right away. This payment structure can be especially helpful for loved ones who are handling a decedent’s funeral and final medical expenses in the days and weeks immediately following an individual’s death. The money can be used to reimburse a portion of those expenses or can be used to provide for other crucial needs.
One further benefit of lump-sum life insurance settlement options is that getting the payout all at once means that if the beneficiary is not under immediate financial strain, he or she can choose to invest the money to generate additional income from the interest. How much income this method is likely to create depends on the amount of money and the type of investment, but even a modest sum held in a relatively stable investment such as a certificate of deposit (CD) account will accrue more interest than the same amount of money paid down on expenses or held in checking. In short, A lump-sum payout gives the beneficiary a wider range of options for how to handle the funds than he or she would otherwise likely enjoy.
Drawbacks of Lump-Sum Life Insurance Payouts
The most notable potential drawback of lump-sum payouts as life insurance settlement options is essentially the same as their leading benefit: The beneficiary has near-instant access to the full amount of the money left to him or her under the life insurance policy. While this rapid access can be an enormous boon in terms of covering the expenses that families often see during the immediate aftermath of a loved one’s death, and creates a broad range of options for how to use any remaining funds going forward, it also means that the money is available for misuse.
Beneficiaries who are deeply in debt may see their entire share seized; those who struggle with financial management skills may simply be ill-equipped to make the most of a large sum received all at once. Unlike some other estate planning tools, a life insurance policy does not give the person preparing an estate plan the option to choose how the gift they are leaving a loved one will be doled out –– the responsibility for choosing among the various life insurance settlement options rests squarely, for better or worse, on the shoulders of each beneficiary, to manage the gift left to them in accordance with their own best interests.
Life Insurance Settlement Options: Fixed Period Installments
Another very common choice among life insurance settlement options is an installment arrangement, also sometimes known as a “fixed period” life insurance payout. Under an installment life insurance settlement option, the beneficiary receives the full amount of the death benefit over a series of payments over a period of years. A Florida estate planning lawyer with Loughlin Law, P.A., may be able to help you evaluate your life insurance settlement options to reach a wise decision.
How Long Are Life Insurance Installment Periods?
Time ranges for the period over which the payments will be spread can vary widely. Much of the experience of receiving the death benefit will likely depend on the length of the fixed period. Depending on how the interest generation is set up, the amount paid to a beneficiary per installment may vary, in large part because the money remaining with the insurance provider after each payment is made will continue to earn interest –– meaning that the amount to be paid out is ultimately not static, but rather based on the amount for which the policyholder originally took out the life insurance policy.
Who Needs a Fixed Period Life Insurance Settlement?
Installment plans for life insurance payouts can be extremely helpful for beneficiaries who need their loved one’s life insurance to provide a relatively predictable form of income replacement, particularly if the beneficiary has significant debts or other reasons to be concerned about the ramifications of receiving a large lump sum payment. The other side of that coin, of course, is that a beneficiary who chooses a fixed period life insurance payout will not have the same degree of flexibility in accessing and using the death benefit for investment or even near-term expenses. How any specific beneficiary will weigh the various factors to be considered will depend heavily on the circumstances of their particular situation, but as a general rule, fixed period life insurance settlement options make the most sense for relatively large death benefits, and they tend to be less frequently used for smaller sums.
Discuss Your Life Insurance Settlement Options With a Florida Attorney
Whether you are taking out a life insurance policy to provide for loved ones after you are gone, or preparing to claim the death benefit a friend or family member has left to you, understanding the differences between your life insurance settlement options is an important first step toward weighing the advantages of each. Some life insurance settlement options can have significant long-term implications for taxes and other considerations, so you may find it helpful to discuss your life insurance settlement options with an estate planning attorney prior to making a decision. Florida residents can reach the estate planning team at Loughlin Law, P.A. by calling 561-559-6214 today.
