Settlement Options Flashcards
List 2 biggest Settlement Options to determine?
When can this option be changed?
What are the 2 categories of settlement options?
A life insurance policy’s death benefit can be paid out or “settled” in many different ways.
- mandate that the settlement option not be changed by the beneficiary (via the spendthrift clause)
- allow the beneficiary to select the desired option.
The policyowner may change the settlement option at any time.
There are two categories of settlement options:
- those without a life contingency
- those with a life contingency
What does Without a Life Contingency mean?
What are the 4 settlement options?
Payment is not determined or affected by the life (or death) of the person receiving the income payment.
In this category, there are four settlement options:
- lump-sum cash payment
- interest-only payment
- payments for a fixed period
- payments of a fixed amount
How is the Lump-Sum Cash Payment Option being offered to customers now?
A cash payment of policy proceeds is often referred to as a lump-sum cash payment.
A retained assets or beneficiary access account the company provides the beneficiary with a checkbook that can be used to withdraw funds from the life insurance proceeds.
How does the Interest-Only Payment Option work?
- The insurer holds the policy proceeds in an interest-bearing account until a future date selected by the beneficiary (or the policyowner) and
- Pays out just the interest
- The interest rate used with this option is the higher of a guaranteed rate specified in the policy or a current rate.
At the end of the interest-paying period (or upon request by the beneficiary), the proceeds that have been held by the insurer are paid out, either in a lump sum or under one of the other settlement options.
Explain the Fixed Period Option.
Under a fixed period settlement option,
- the death benefit is paid in equal installments over a fixed period of time
- Payments consist partly of death benefit proceeds and partly of interest earned on the undistributed funds remaining with the insurer.
For example, a five-year payout period for a $100,000 death benefit would produce monthly payments of $1,667 ($100,000 ÷ 60 months = $1,667) plus interest. The payee’s mortality does not affect the amount or duration of payments under this option. If the payee dies before the selected period ends, payments continue to the contingent beneficiary until the end of the period. The contingent payee can choose to receive a lump sum equal to the present value of the final payments. (Present value is the value today of a future sum of money—either a lump sum or a stream of payments—discounted at an interest rate.)
Explain the Fixed Amount Option
- the beneficiary designates the payment amount, and the time period depends on the size of the death benefit.
- the larger the payment amount, the shorter the payout time period.
What does “with a Life Contingency” mean?
Name 4 lifetime income options.
- A settlement option with a life contingency is based on the lifespan of the payee
- The payment amount is based on the payee’s life expectancy, with longer life expectancies yielding smaller periodic payments.
- In essence, the proceeds of the insurance policy are used to buy an immediate annuity on the payee’s life.
Life Income = payments that the payee cannot outlive.
There are four lifetime income options:
- single (straight) life income
- life income with period certain
- life income with refund
- joint and survivor life income
List 3 characteristics of a Single (Straight) Life Income Option
No guarantee of payout =
- Under this option, the policy’s proceeds are converted into an income stream that lasts the beneficiary’s entire life.
- Payments cease at the beneficiary’s death.
- Generally provides the largest payment amount to the payee.
The absence of payment guarantees translates into a higher payment than would be the case if there were a payment guarantee.
For example, assume that Lydia is the beneficiary of her husband’s $150,000 life insurance policy. At his death, if she were to elect a straight life income settlement option, she would receive payments of about $800 a month, or $9,600 a year. Those payments will continue as long as Lydia lives, whether she lives past her life expectancy or dies before it. No payment is made to any contingent payees at the primary payee’s death.
What does “Life Income with Period Certain” mean?
Under the life income with period certain settlement option, a payee receives income payments for life. However, payments are guaranteed for a specified term.
For example, a life income with ten-year period certain provides payments to the payee for life. It also guarantees that those payments will be made for at least ten years.
So, if the payee died six years after payments begin, then payments will continue to a contingent payee for the remaining four years of the term.
If the payee dies the Life Income with Refund goes to whom?
They can receive that payment in what 2 ways?
if the payee dies before receiving payments equal to the amount initially placed under this option, the remainder goes to a contingent payee as a refund.
Refunds are available under either of two options:
- installment refund option: income payments continue to a contingent payee in the same amount as were paid to the primary beneficiary.
- cash refund option: the contingent payee receives a lump-sum payment of any remaining balance.
Under the cash refund option, t
Define the Joint and Survivor Life Income Option
List the 3 most common J & S options.
Monthly payments are made until the second payee (survivor) dies
The most common joint and survivor options are
- joint and 100 percent survivor, in which the payment continues unreduced upon the first payee’s death;
- joint and two-thirds survivor, in which payments are reduced by one-third upon the first payee’s death (with two-thirds continuing to the survivor); and
- joint and one-half survivor, in which payments are reduced by one-half upon the first payee’s death.
For example, a $200,000 death benefit might provide the following options to a couple:
joint and 100 percent survivor: $1,000 per month to joint payees and $1,000 per month to surviving payee
joint and two-thirds survivor: $1,200 per month to joint payees and $800 per month to surviving payee
joint and one-half survivor: $1,400 per month to joint payees and $700 per month to surviving payee
Joint and Survivor with Period Certain
For those who want added assurance of guaranteed payments, it is possible to set up a joint and survivor settlement option that includes a period certain guarantee. This is most likely if both payees are elderly when joint and survivor payments begin. With this option, if both joint payees die before the end of the period certain, payments continue to the end of the period.
