Life insurance companies offer a number of settlement (payout) options at death. This is true for group as well as individual policies. The option you choose will depend on your short-term and long-term income needs, as well as your faith in your ability to manage your finances. We strongly recommend that you elect the lump sum option and integrate the proceeds into the financial plan you develop with the knowledge gained in Chapter 5.

The most popular distribution options are summarized below:

LUMP SUM

Lump sum distributions are the most common form of life insurance payout. They allow you full and immediate access to proceeds to pay current expenses and invest the money however you see fit. In most cases, a lump sum payment is preferred. The cash proceeds can be invested consistent with your financial plan (see Chapter 5) considering your need for income and future growth.

LIFE INCOME

Proceeds from the policy are paid to you over the balance of your life. The monthly benefit depends on your age and gender, and is calculated using standard actuarial tables of life expectancy. The life income option has a number of important drawbacks. Although you are guaranteed a payment for life, the payment is not adjusted for inflation. Once the life income option is chosen, it may not be altered. Finally, your heirs would be adversely affected by your premature death, since payments stop at your death, even if you die after receiving only one payment! For these reasons, life income is the least attractive payment option.

LIFE INCOME, PERIOD CERTAIN

The life income, period certain option provides income for the longer of your life expectancy or the period certain (usually five or ten years). If you die before the period certain, your beneficiary continues to receive the income amount for the balance of the period. For example, if you choose a “life income, ten year certain” option, and die after six years, your beneficiary is entitled to income for four years after your death. The period certain feature eliminates the risk of early death, but will reduce your payment.

LIFE INCOME, INSTALLMENT REFUND

This option guarantees the return of your investment. Amounts not paid to you as life income will be paid to your beneficiary in a lump sum. For example, if you placed $100,000 under the life income, installment refund option, and had received $70,000 by the time of your death, your beneficiary would receive $30,000.

FIXED PERIOD

The fixed period option provides income for a specific period of time such as ten or fifteen years. This option may be appropriate when you need income only for a set number of years. Because it is not a life income, the amount will be higher than any of the life income options.

INTEREST ONLY

The interest only option pays interest at regular intervals, but you reserve the right at any time to elect another option or a lump sum. The interest only option is best used on a temporary basis while you complete your financial plan.

The following chart illustrates the anticipated monthly payment for the various non-lump sum settlement options based on a $100,000 death benefit:
 

* Income figures are based on guaranteed interest rates. Actual, or "current" rates will likely be higher.