Most term life insurance plans come with a dizzying array of payout options. While some offer obvious advantages for plan beneficiaries, many are structured to favor underwriters.
What Options do I have for Death Benefits?
A term life insurance policy may pay its death benefits in one of three ways. If the beneficiary opts to take a lump-sum payment, the underwriter must pay out the policy’s full face value via check or electronic deposit. Lump-sum payments do not accrue interest: A $200,000 policy will pay out exactly $200,000 upon the death of the insured party.
Although they are not the most common payout option overall, lump-sum payments may be useful for heavily-indebted beneficiaries.
If the beneficiary opts to receive the death benefit as an annuity, they may be presented with a staggering menu of choices. No matter how the beneficiary elects to receive their annuity payments, this payout method confers one major advantage: all unpaid benefits accrue interest over time.
Annuity payouts come in several forms. Beneficiaries may receive “life only” payouts, which are calculated according to their life expectancy and include accrued interest, every year until they die. Upon their death, payments terminate and the insurer keeps any balance that remains.
“Period Certain” vs. “Amount Certain” Payout Options
Beneficiaries may receive “period certain” payouts in equal amounts over a fixed period of time, usually ranging from five to 30 years. If the beneficiary dies before the period ends, payments may be transferred to a surviving recipient.
Like “period certain” payouts, “amount certain” benefits pay out in equal amounts until the face value of the original policy has been exhausted. Beneficiaries may specify the amount to be received each year. The payout period’s duration depends entirely upon the size of each installment.
Since they are made up solely of the interest generated by the original policy’s face value, “interest income” payouts are far smaller than other annuity installments. Of course, beneficiaries can elect to receive the full value of the interest-generating principal at any time.
Since they offer a guaranteed stream of income for a multi-year period, annuities are the most common term life insurance payout option. Within this category, “period certain” payouts are among the most popular.
The majority of term life insurance beneficiaries still opt to receive benefits either in a single payment or as a permanent annuity. However, many insurers now offer interest-bearing checking accounts with full check-writing privileges. These enable beneficiaries to exercise complete control over their funds, drawing upon their accounts as much or as little as they see fit. For insurers, they represent a valuable source of investment income.