How Is Payment Made to Beneficiaries on a Life Insurance Policy?
The beneficiary--the person to receive the benefits of the life insurance policy--is picked upon opening the policy. The owner of the policy is normally the one who chooses the beneficiary.
When the insured dies, the beneficiary is able to pick one of several methods of payment. Once the selection is made, it cannot be changed. If the beneficiary is unsure which method would be best, it may be wise to consult a financial adviser or trusted counselor.
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Lump Sum
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The beneficiary may choose to take a one-time lump sum payout. This income tax--free payment will be for the face value of the policy, including any adjustments such as loans against the policy. After the payment is completed, the policy ends.
Life Income
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If beneficiaries desire a life income, they will receive guaranteed periodic payments. The payments and periods are negotiated at the time of the decision regarding which type of payout will be received. Many people dislike this option because the insurance company keeps the balance of the lump sum when the beneficiary dies. If that is earlier than anticipated, the estate never sees the full benefit of the policy.
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Life Income With a Period Certain
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A guaranteed period of time for payout is known as a "Life Income With a Period Certain." A secondary beneficiary will continue to receive payments from the insurance company if the primary beneficiary dies before the period of time has ended.
Joint and Last Survivor Income
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"Joint and Last Survivor Income" ensures that both the primary and secondary beneficiaries will receive payment for the lifetime of the longest lived. If one dies before the other, the payments switch over and continue with the living beneficiary.
Interest Income
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A variation of the lump sum payment, the "Interest Income" provides the primary beneficiary with an income based on the interest due on the total benefit, with the lump sum benefit going to the secondary beneficiary when the primary dies. Oftentimes this is used with a minority-aged beneficiary, and when he or she reaches a certain age, the lump sum is paid.
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