When I die, is my beneficiary required to take a lump-sum payment of my life insurance death benefit?
It isn't necessary for your beneficiary to take a lump sum, although many people prefer that option. Many settlement options for life insurance proceeds exist. Some of the more common options are as follows:
- Interest option, where the life insurance company retains the proceeds and pays only the interest earned to the beneficiary at regular intervals
- Fixed-period option, where the company pays the proceeds together with the interest at regular intervals for a fixed period of time
- Fixed-amount option, where benefits are paid in fixed amounts at regular intervals until the proceeds and the interest are depleted
- Annuity option, where the proceeds and the interest are used to provide regular payments to the beneficiary for the remainder of his or her life
- Lump sum, where the life insurance company pays the total amount of the benefit in one single payment at the death of the insured
Your beneficiary may have flexibility within the options, as well. For example, if your beneficiary chooses the fixed-amount option, your beneficiary might elect to receive $250 per month for the first five years, and then $500 per month until the proceeds are depleted. Your beneficiary may also choose a combination of options. For example, your beneficiary could receive the interest option until retirement and then receive the remainder of the benefit as an annuity.
Your company will allow your beneficiary to choose how the proceeds are received when they become payable. If you think it's necessary, you may choose how the beneficiary will receive the proceeds when you purchase the policy. Consult your financial professional to see what choices your life insurance company offers.