Traditionally, when a death occurs and a there is a payout under a life insurance policy, it's done as a lump sum payment. Over time, both consumers and financial advisors have expressed concern about this method of payout as not necessarily being in the best interests of the beneficiary. In recent years, there have been changes made to life insurance policies that now give payout options. Here are the different choices that policyholders can make when they purchase a life insurance policy.
Lump Sum Payment
While there are now other options available, the traditional lump sum payment is still a popular choice. In fact, it can be difficult to predict what the future holds for a beneficiary and setting up a lump sum payout gives a spouse or other survivor options. That being said, many today prefer a payout option other than a lump sum.
According to the 2016 LIMRA Insurance Barometer Study, consumers under the age of 40 would rather receive a life insurance policy payout as a continuous income stream as opposed to a lump sum payment. The study found that 61 percent of consumers were purchasing insurance to replace lost income, and 4 in 10 who are under the age of 40 would prefer a monthly benefit payout. There are several types of income stream payment options with a life insurance policy.
"Life Income" provides that the beneficiary will receive monthly payments in a fixed amount for as long as they live. Life income can also be agreed to with a certain number of years on the payout, which will adjust the monthly payout up or down depending on the term length. A "Joint and Survivor Life Income" payout will guarantee payments to either one or two beneficiaries for as long as the last beneficiary is still alive. A "Specific Income" policy allows you to select how much monthly income you would like for your beneficiary to receive and this is what will be paid until the death benefits are exhausted.
Selecting the right payout method depends on your preferences and your beneficiary's future needs.
Other Types of Payouts
There are several other types of life insurance payment options that don't fall into the two categories we've just mentioned. An "interest only" payout provides that just the earned interest is paid for a certain period, and then policy proceeds are paid later under another arrangement or can often be demanded by the beneficiary at any time. It may also be possible under some policies to receive advanced payment of life insurance proceeds.
Before choosing a payout option for your life insurance policy, carefully evaluate your financial needs and the future needs of your beneficiary. It might also be useful to consult a financial advisor or tax specialist to determine the implications of each choice. Contact us with any questions about life insurance payout options or to start your quote with our simple process.