CARD T135
Settlement Options
Choices for receiving policy proceeds. A beneficiary might receive a lump sum or installment payments.
How it works
Settlement options determine how insurance proceeds are paid: for example, a lump sum, interest only, fixed period, fixed amount, or life income. A valid selection by the policyowner may limit choices available to the beneficiary. Death proceeds generally are excluded from federal income tax, but interest included in later payments is generally taxable. Life-income guarantees and survivor provisions depend on the chosen option. [2] [6]
A beneficiary compares taking $100,000 at once with leaving the funds with the insurer for scheduled payments. The payout method changes, not the identity of the insured event.
Settlement options pay proceeds. Nonforfeiture options preserve eligible value when premium payments stop.
CARD T136
Interest-Only Settlement
A settlement option leaving proceeds with the insurer while interest is paid. Access to principal follows the settlement agreement.
How it works
Under an interest-only settlement, the insurer retains the principal and pays interest to the recipient. The agreement governs the rate, payment frequency, access to principal, and later distribution of principal. The interest is generally federally taxable. This is different from using each payment to spend down both principal and interest. [2] [6]
At a stated 3% annual rate, $100,000 of retained proceeds produces $3,000 of annual interest. If only interest is paid and there are no other deductions, the $100,000 principal remains.
Interest-only payments do not ordinarily exhaust principal by design; fixed-amount payments can.
CARD T137
Fixed-Period Settlement
An option distributing proceeds and interest over a chosen period. The payment duration is specified.
How it works
A fixed-period settlement pays proceeds and interest over a selected time, such as ten years. The period is chosen and the payment amount is calculated from the funds, interest assumptions, and schedule. An ordinary fixed-period option is not contingent on the recipient living throughout that period; the agreement provides for unpaid installments if the recipient dies. [2]
A beneficiary selects ten years of monthly payments. The insurer calculates 120 installments under the settlement terms.
Fixed period fixes time; fixed amount fixes the payment. Neither is automatically a lifetime-income guarantee.
CARD T138
Fixed-Amount Settlement
An option paying a chosen amount at regular intervals until available proceeds and interest are exhausted. The duration can vary.
How it works
A fixed-amount settlement pays a selected amount at each interval until proceeds and interest are exhausted. The payment is fixed, while duration depends on the available funds, interest, and amount withdrawn. Increasing payments generally shortens the duration if other factors remain the same. [2]
Ignoring interest and fees, $60,000 paid at $1,000 per month lasts 60 months. At $2,000 per month, it lasts 30 months.
A fixed amount is not necessarily a lifetime benefit. Funds can run out while the recipient is alive.
CARD T139
Spendthrift Provision
A clause that can keep a beneficiary from transferring future installment payments to someone else and protect money still held by the insurer from certain creditors. Protection depends on the law and payment arrangement.
How it works
A spendthrift provision can restrict a beneficiary’s ability to assign future installments and may protect proceeds retained by the insurer from certain creditor claims. Protection depends on applicable law and the settlement arrangement. It is not a universal shield against every creditor, and money already distributed may receive different treatment. [19]
A beneficiary receiving installments seeks to sell the right to future payments. A valid spendthrift restriction may prevent that assignment.
Spendthrift restrictions concern proceeds and beneficiary rights, not the owner’s choice of nonforfeiture option.
APPLY THE TERMS
Practice questions
Select an answer, then check it to see why each option is right or wrong.
T135 · Settlement Options
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T136 · Interest-Only Settlement
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T137 · Fixed-Period Settlement
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T138 · Fixed-Amount Settlement
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T139 · Spendthrift Provision
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Sources & further reading
Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.