True Statements About Life Insurance Settlement Options

The correct statements are that a policyholder can receive a lump‑sum cash payment, elect an annuity to receive regular payments over time, or choose an interest‑only settlement where the insurer holds the death benefit and pays interest to the beneficiary. Each option has distinct tax, cash‑flow, and inheritance implications.

Settlement Options Overview

Life‑insurance settlements typically fall into three categories: lump‑sum cash, annuity, and interest‑only. The choice depends on the beneficiary's financial goals, tax considerations, and need for ongoing income.

Lump‑Sum Cash Payment

This is the most common settlement. The insurer pays the full death benefit immediately, providing maximum liquidity. It is generally tax‑free for the beneficiary, but the amount may affect eligibility for means‑tested government programs.

Annuity Settlement

Beneficiaries receive the death benefit as a series of periodic payments, often monthly or annually, for a set term or life expectancy. Annuities can spread tax liability over years and provide steady income, but the total received may be less than the cash value due to insurer fees and mortality discounts.

Interest‑Only Settlement

Here the insurer retains the principal death benefit and pays only the accrued interest to the beneficiary. The principal is preserved for future heirs or estate planning purposes. Interest is taxable each year, and the ultimate payout depends on the insurer's creditworthiness.

Key Considerations

• Tax impact: cash benefits are generally tax‑free, but annuity and interest income may be taxable.
• Cash flow needs: immediate expenses favor lump‑sum; long‑term income needs favor annuities.
• Estate planning: interest‑only can keep the principal within the estate.

Comparison Table