Settlement Options Life Insurance More Than Death Benefit Explained

Life insurance policies often offer more than just a death benefit. In fact, many policies have settlement options that can provide financial support to policyholders while they're still alive.

These settlement options can be a valuable resource for individuals facing serious illnesses or disabilities. For example, some policies have a terminal illness benefit that allows policyholders to access a portion of their death benefit while they're still alive.

Policyholders can use these funds to cover medical expenses, living costs, or other financial obligations. By doing so, they can focus on their health and well-being without adding financial stress to their situation.

Some policies also have a living benefit rider that allows policyholders to access a portion of their death benefit if they're diagnosed with a chronic illness or disability.

Life insurance policies offer more than just a death benefit, and understanding the basics can help you navigate the settlement options available to beneficiaries. A beneficiary can receive a lump sum payment after the insured person's death.

Some common life insurance settlement options include receiving interest earnings only, with full or partial withdrawals made later. This option allows beneficiaries to access the policy's value without depleting the death benefit.

Beneficiaries can also choose to receive regular payments over a fixed period of time. This can provide a steady income stream for a set number of years.

Another option is to receive life only payments for the rest of one's life, based on age. This type of payment is guaranteed for life, regardless of the policy's value.

A beneficiary may also choose a lifetime income with period certain option, which pays out income for the person's whole life or a specified period, whichever is longer. This option provides security and predictability for the beneficiary.

Life insurance settlement options can be a lifesaver for those who need access to funds beyond the death benefit. You can choose to receive a lump sum payment from the death benefit.

Some policies allow you to take a policy loan up to the amount of the cash value, which can be a great way to meet immediate financial needs. This option is available if your policy has a cash value.

You can also consider reducing the amount of the death benefit to lower your premium payments. This may be a good option if you're finding it difficult to afford the premiums.

If you're terminally or chronically ill, you may be able to accelerate some or all of the death benefit while you're still alive. This option is called an accelerated death benefit.

Beneficiaries can also choose to receive regular payments over a fixed period of time or for the rest of their life, based on age. This option is called a life only payment.

Another option is to leave the death benefit with the insurance company in an interest-bearing account to continue to grow in value. This way, you can make full or partial withdrawals whenever you choose.

Beneficiaries may also be able to choose a lifetime income with period certain option, where the insurer pays out income for their whole life or a certain period, whichever is longer.

A lump-sum payout is the simplest option, and it's commonly used. The entire amount owed under the policy is paid to the beneficiaries in a single payment, tax-free.

The funds can be used however the beneficiary chooses, but it's worth noting that some people might quickly use up the money, leaving themselves without financial security for the future. This can be a risk, especially if the policyholder intended for the benefit to be used for specific purposes.

You can receive a lump-sum payment as a check, and it's a straightforward way to access the death benefit. This can be useful for paying off debts, such as a mortgage, or for saving or investing the money.

A lump-sum payout is often the simplest option, but it comes with its own risks. Some beneficiaries may use up the funds quickly, leaving themselves with no financial security for the future.

The amount of the payout is tax-free to the beneficiaries, and it usually arrives as a check. This can be a welcome surprise, but it's essential to consider the long-term implications of receiving a large sum of money.

Beneficiaries have the freedom to use the funds as they see fit, which can be both a blessing and a curse. They may assume the benefit will be used for specific purposes, but ultimately, it's up to them to decide how to spend the money.

A lump-sum payout is often the simplest option, and it's commonly used. The entire amount owed under the policy is paid to the beneficiaries in a single payment.

This payment is tax-free to the beneficiaries and usually arrives as a check. Lump-sum payouts are often used to pay off debts, such as a mortgage.

You can use the funds any way you wish after receiving them. However, some beneficiaries may receive their life insurance settlements and quickly use up the funds, leaving themselves none of the financial security for the future.

A lump-sum payment gives you full access to the death benefit, and you can spend the money as you choose. This can be a great way to pay off debts or save for the future.

The amount you receive is the entire death benefit, and you can use it to pay off debts or save for the future.

Life insurance settlement options can provide a steady income stream for beneficiaries, giving them greater certainty in finances. A life income payout, for example, provides guaranteed payments for the rest of the beneficiary's life, based on their age and the death benefit amount.

The amount of payment may be limited if the beneficiary is young, as the insurance company will be calculating payments over a longer period. However, this option can ensure a steady income stream for the beneficiary.

A life income payout with a period certain is another option, where the beneficiary receives a certain number of payments even if they die before those benefits are paid. This can provide a sense of security for the beneficiary and their loved ones.

With a specific income payout, the policyholder can select the time period and payment amounts, giving them more control over the settlement. For instance, a policyholder can provide for each beneficiary to receive ten years of payments at $25,000 each.

Lifetime income, also known as life only payments, is another option, providing payments designed to last for the rest of the beneficiary's life, based primarily on their age. This approach can help prevent the beneficiary from spending the entire death benefit prematurely.

A life settlement is not taxable for the amount you've already paid in premiums on the policy, known as the cost basis. This can be a significant advantage for policyholders who have paid premiums for many years.

The cost basis in life settlements refers to the total amount of premiums that have been paid into the life insurance policy by the policyholder minus any previous withdrawals. This represents the total investment made by the policyholder over the life of the policy.

If the policy's cash surrender value is greater than the cost basis, the difference between the amounts is taxable as ordinary income. This can be a surprise for policyholders who didn't expect to pay taxes on their life settlement.

Taxing a life settlement can be complex, but it can be broken down into three key parts: the amount not taxable, the amount taxed as ordinary income, and the amount taxed as capital gains.

Viatical and settlement options offer individuals more than just a death benefit. A viatical settlement is an arrangement designed for individuals facing terminal illnesses, allowing them to sell their life insurance policy to a third-party investor for an immediate lump sum payment.

In a viatical settlement, the policyholder receives a percentage of the policy's face value, typically a percentage that is less than the full face value. This financial transaction provides individuals with life-threatening illnesses the means to access funds to cover medical expenses.

Viatical settlements relieve the individual from having to pay any remaining life insurance premiums, allowing them to redirect that money elsewhere. This can be a compassionate solution for policyholders who may have limited options due to their health condition.

A traditional life settlement is also an option, where the policyholder sells their life insurance policy to a third-party investor in exchange for a lump sum payment.

If you're considering settlement options for your life insurance policy, there are several scenarios where it may make sense. You're over 65 and your health has declined, making the policy no longer necessary for your heirs.

A term policy is nearing its end, but you still need insurance for a specific period. You've experienced a significant life change, such as divorce, and your insurance needs have shifted.

You're a business owner who's selling the business, and the insurance is no longer needed. You've retired and received life insurance through deferred compensation, but you don't need or want it.

You're struggling to pay premiums and the policy has been performing poorly. In these situations, selling your policy may be a viable option.

Here are some possible scenarios where a life settlement makes sense:

Let's take a look at some real-life examples of how life settlements have benefited policyholders. A client age 75 had two $2,000,000 policies owned by a business that was sold, making the policies unnecessary. The cash value of each policy was less than $35,000, but they were sold for $409,000 and $984,000 respectively.

In another case, a client age 92 had a trust with six policies, each with a $1,500,000 death benefit. The trust was able to sell three of these policies for over $1,000,000 each, providing the trust with the funds to pay premiums for the remaining policies.

A client age 65 had a $5,000,000 10-year term policy that was no longer needed after they obtained a joint policy. The term policy was sold for $20,750, which was roughly the same amount that had been paid into the policy.