Life insurance can be a vital gift to protect your loved ones after your passing. However, determining the details of a life insurance policy can be challenging. Whom should you name as a beneficiary of the policy? What type of life insurance policy is best to purchase? How should beneficiaries receive the death benefits? For assistance with these questions and more, consider discussing life insurance as an estate planning tool and reviewing your various life insurance settlement options with an estate planning lawyer with Roulet Law Firm, P.A. during a confidential consultation. Schedule your appointment today by calling our Minnetonka, MN office at (763) 420-5087 or our Florida office at (941) 909-4644.
What Is a Life Insurance Settlement?
A life insurance settlement is the death benefit that is paid out to the policyholder’s named beneficiary or beneficiaries. The policyholder pays premiums each month or year to maintain the life insurance policy. With term life insurance, the policy is active for the specified term, such as ten or twenty years. With a permanent life insurance policy, the policy is designed to be active throughout the insured individual’s entire life. After the individual insured under the policy passes away, their beneficiaries receive the death benefit amount according to the terms of the policy.
What Is the Average Life Insurance Settlement?
According to AFLAC, the average life insurance settlement is $168,000. Life insurance can help pay for an individual’s final expenses, and serve as a replacement for the policyholder’s income if they leave behind dependents. Some financial advisors recommend having life insurance that is ten or fifteen times the amount of the insured individual’s annual salary.
Consumer Reports emphasizes that individuals should consider their own needs when determining the amount of life insurance they should purchase. A common rubric involves selecting a life insurance policy whose total value is estimated to cover the obligations and needs of family members the decedent leaves behind, which may include the following:
- Additional childcare costs if a widowed spouse will need to return to work
- College educations for orphaned children
- Mortgage debt
- Credit card debt
- Additional medical costs
- Financial support for elderly parents
- Future inflation
- Replacement for anticipated salary increases
What Are the Settlement Options for Life Insurance?
When an individual purchases life insurance, that person can generally select how they want the benefits to be paid to the persons named as beneficiaries for the life insurance settlement payout. If the policyholder does not select a life insurance settlement option when purchasing the policy, the beneficiaries may be able to choose how they would prefer to receive the death benefit. The various life insurance settlement options may include the following:
Lump-Sum Payout
In the instance of a lump-sum payout, beneficiaries receive the entire amount owed under the policy with a single payment. They can use the funds any way they wish after receiving them. The amount is paid tax-free to the beneficiaries, and usually arrives as a check.
While a lump-sum payout is often the simplest option and is commonly used, it does come with its own risks. Some beneficiaries may receive their life insurance settlements and quickly use up the funds, leaving themselves none of the financial security for the future that the policyholder intended the policy to provide. If a person leaves the benefit to their spouse, they may assume the spouse will use the funds for their children, but the spouse is not obligated to do so. Once a beneficiary has the money, they can use it however they see fit.
Life Income Payout
A life income payout provides guaranteed payments for the rest of the beneficiary’s life. The amount of the payment is based on two main factors: the beneficiary’s age at the time they become eligible for the benefit, and the death benefit amount.
A life income payout can ensure a steady income stream for the beneficiary and may provide greater certainty in finances than a lump-sum option. However, if the beneficiary is young when they receive the death benefit, the individual payment amounts may be limited because the insurance company will be calculating on the need to make payments over a much longer stretch of time than might be the case with an older beneficiary. If the beneficiary dies before collecting the full amount of the death benefit, the insurance company may be able to keep any remainder. If a beneficiary wishes to receive the benefit as a lump-sum instead, there may be additional charges or fees they have to pay.
Life Income Payout With Period Certain
With this option, the beneficiary receives a certain number of payments even if they die before those benefits are paid. If the beneficiary chooses a life income payout with a ten-year period but then dies after only five years, the beneficiary’s own beneficiaries will receive five years of payments in their place.
Specific Income Payout
With a specific income payout, the purchaser of a life insurance policy can select the time period over which their beneficiaries will receive payments and the amounts of those payments. A policyholder with a life insurance policy worth$500,000 who names two beneficiaries could provide for each beneficiary to receive ten years of payments at $25,000 each.
Retained Asset Account
Another option is to have the life insurance company keep the death benefit in a financial account from which beneficiaries then draw, as needed. This life insurance settlement option works similarly to a checking account. The funds are retained in an interest-bearing account, and the policy’s beneficiaries use the funds as they see fit.
How Do Beneficiaries Receive Life Insurance Settlements?
To receive life insurance settlement payouts, beneficiaries must file a claim with the policyholder’s life insurance company. Once the insurance company receives proof of death, reviews the claim, and approves it, beneficiaries may be able to choose how they would like to receive the payout.
When Do Death Benefits Need To Be Paid?
State law or the terms of the life insurance policy may state when death benefits need to be paid out to beneficiaries. In Florida, life insurance companies are not required to pay out life insurance proceeds within a certain timeframe. However, Chapter 627 § 4615 of the Florida Statutes states that if the policy provides for a lump-sum death benefit, insurance companies must pay interest on the settlement amount from the day the insurer receives the claim with proof of death. The amount of interest must be equal to or greater than that of the Moody’s Corporate Bond Yield Average-Monthly Average Corporate amount, or at least 8% if the method of calculating the index is substantially different from that used for calculating this amount as of January 1, 1993.
According to Minnesota Statute 61A § 011, the insurance company must pay interest, beginning from the date of the notice of claim, until the payout is made. This interest must be calculated at a rate at least that of the insurance company’s interest rate for death proceeds. If the insurance company takes more than 60 days to pay the claim, it must pay interest that is 2% more than its typical interest rate.
Contact an Estate Planning Lawyer for Assistance
Individuals who are considering their life insurance settlement options may wish to consult with a knowledgeable estate planning lawyer with Roulet Law Firm, P.A. An experienced estate planning attorney may be able to review your circumstances. Consider contacting the firm today and scheduling an appointment to discuss which options can best achieve your objectives. Call our Minnesota office at (763) 420-5087 or our Florida office at (941) 909-4644 to get started today. Or, you can fill out the contact form on this page and a member of our team will reach out to you.
And, if you are not yet ready to put a plan in place or to update your old one and would like additional information, we have a couple of helpful resources for you.
If you would like to learn how to make it as easy and inexpensive as possible for your family to manage your affairs during incapacity and after passing, while ensuring your assets only go to whom you want and how you want, click here to register for our FREE online masterclass.
And, if you would like to learn how to protect your home and life savings from long-term care and nursing home costs, click here to download our FREE guide Save our Home: How to Protect Your Home and Life Savings From Long-Term Care and Nursing Home Costs.
