Methods used to pay the death benefit to a beneficiary upon the insureds death are called

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Life insurance can provide money to your loved ones at a critical time. When an insured person dies, their beneficiary is then eligible to receive the policy's death benefit. Some people may think of a life insurance death benefit as a lump-sum payment, but insurers typically offer a variety of life insurance settlement options. Here's some information on how death benefits typically work and some of the settlement options that may be available to you as the beneficiary.

A death benefit can be a valuable asset, and insurers provide various options for disbursing payments after death. In rare cases, the policy owner might specify which life insurance settlement options they want to provide for beneficiaries, and they may even restrict when beneficiaries can receive funds. But in most cases, beneficiaries have options, and you can select the option that works most appropriately for your needs.

There are common settlement options that life insurance companies typically offer. In addition to choosing from the options below, you can often customize the payment structure (other than lump-sum arrangements) and may be able to receive funds monthly, quarterly or annually. You should keep in mind that interest that is earned or paid out as part of a life insurance settlement option is taxable as regular income when received.

Lump-Sum Payment

A lump-sum payment is perhaps the easiest to understand. With this option, you receive the entire death benefit as a one-time payment. This gives you full access to the death benefit, and you can spend the money as you choose. This may enable you to pay off debts such as a mortgage. You can also save or invest this money after receiving the lump-sum payment.

Interest Only

With an interest income option, the insurance company holds the principal of the death benefit and pays you the interest earned. Any interest earnings would be paid out to you, and you can typically take full or partial withdrawals at almost any time if you need more money. This option may make sense if you only need a small amount of income from the death benefit.

Interest Accumulation

If you don't need money immediately, you can leave the death benefit with the insurer in an interest-bearing account. Any interest earnings stay in that account, and the monetary value would continue to grow with compound interest. You'll still have access to the funds and typically can make full or partial withdrawals when you choose.

Fixed Period

Instead of taking everything at once, you are able to receive the death benefit over a specified length of time, such as 20 years. That option may make sense if you have predictable expenses, such as mortgage payments, that end at a known date. Those regular payments can also simulate an income, helping to fill the gap that might arise when the deceased stops receiving income. Any funds that remain with the insurance company earn interest, and those earnings get paid out as part of the regular payments.

Lifetime Income

Lifetime income is commonly referred to as life only payments. You can receive payments that are designed to last for the rest of your life (based primarily on your age). This approach may help to prevent you from spending the entire death benefit prematurely, and it could help ensure that you have regular income. Once this is set up, you typically cannot change the payment or take additional withdrawals.

Lifetime Income With Period Certain

Life only payments end after the death of the insured, so the balance of the settlement amount is left with the insurer. When choosing the lifetime income with period certain option, the insurance company pays out income for your whole life or the period certain — whichever is longer. For example, you might choose a 10-year period certain. If you die two years after payments begin, a designated beneficiary that you choose will receive any remaining payments for the subsequent eight years. Keep in mind that this option may result in smaller payments than a pure lifetime income option.

Receiving a life insurance death benefit can be a major life event, and understanding life insurance features can be tricky. In some cases, a lump-sum payment may be what you need most. But sometimes, other options may work better by providing ongoing income, flexibility or other benefits. Consider talking with a financial representative to discuss which settlement options may be right for you.

To start, let’s define death benefit: It’s the money – lump sum or otherwise – that gets paid to your beneficiaries if you die while your life insurance policy is in effect. Whether you’re buying life insurance, or you’re filing a claim on a life insurance policy, there are a few things you need to know about beneficiaries:

• A beneficiary needs to be specifically designated in the life insurance policy 
• There can be more than one beneficiary – and in practice, there often is
• A beneficiary doesn’t have to be a person – it can also be an entity such as a charity, family trust, or even a business

An heir is not necessarily the same thing as a life insurance beneficiary

 An heir is assumed, but a beneficiary is designated. This means that if a person dies intestate (i.e., without a will), his or her heirs are the people who may be legally entitled to inherit the deceased’s estate – their spouse, children, and so forth1. One or more heirs are usually named as beneficiaries on a life insurance policy, but they don’t have to be. In fact, there are many reasons for naming someone other than your spouse or children as beneficiaries, including:

• You want to leave money to care for other family members, such as parents or a sibling
• You could leave money to a family-run business to help ensure continuity of operations after you’re gone
• You decide to leave money to your grandchildren (instead of your children) as part of your tax strategy 

Even though anybody can be named as a beneficiary, you may need permission from your spouse

The most common reason people buy life insurance is to help protect their family’s financial well-being. That’s why married people commonly designate their spouse as the only primary beneficiary, especially when their children are still at home. However, if you live in a state with common property laws, you must name your spouse as the only beneficiary unless you have his or her consent to name someone else. One more thing: underage children can’t ordinarily be named as beneficiaries; if you want to leave money to a minor, you may have to set up a trust to manage the financial payout until they become of age.

Beneficiaries can be changed

When you buy an insurance policy, you can designate each beneficiary as either revocable or irrevocable. When beneficiaries are irrevocable, it can be difficult to remove them from policies or change their share without their consent. For revocable beneficiaries, the change process is relatively easy and you don’t need permission (unless it’s your spouse and you live in a common property state). For example, with Guardian, a beneficiary change can be done online in a few minutes by going to GuardianLife.com and signing in or registering for an account. Other life insurance companies may require a phone call or ask you to fill out a paper form and send it back. An annual review with your agent or financial professional can be a great time to ensure your beneficiaries are up to date.

A life insurance death benefit can be divided up any way the policyholder wants

If you’re one of four beneficiaries, that doesn’t automatically mean you’ll get one quarter of the death benefits. The policyholder can allocate different percentages to different beneficiaries. 

Beneficiaries can use the money any way they want

There are no stipulations or conditions on benefit payouts. You can take the lump sum and use it for living expenses if you need, but you can also use it for any other purpose, from education to retirement savings – or even going on vacation.

The payout may not be subject to taxes

Generally speaking, life insurance death benefits are exempt from income tax (which is one of the most important life insurance tax benefits). While the benefit is usually income tax-free, you should consult with your tax advisor if you receive a death benefit payment.

Sometimes, part of the benefit can be paid out before death

Many life insurance policies have an Accelerated Death Benefit rider (i.e., optional provision) which allows policyholders with a terminal illness to access part of the death benefit amount while they are still alive – usually to help pay for needed care2. The company may need Proof of Life Expectancy from a medical provider in order to accelerate the death benefit; sums paid out will typically reduce the amount disbursed to beneficiaries after death.

Under certain circumstances a death benefit may be decreased

While every reputable company has a long history of paying out insurance death benefits in full, there are some situations in which a death benefit may be reduced:

• If an Accelerated Death Benefit was provided (see above)
• If the policyholder willfully misrepresented his or her information during the application process to obtain lower premiums, the company can reduce the benefit amount accordingly – or in some cases cancel coverage altogether
• If there were outstanding loans against the cash value (this is typically not applicable to a term life policy with no cash value)
• If the policy had an adjustable death benefit (which can be a feature of universal life insurance policies designed for flexibility), the payout may be lower than the original coverage amount
   

Beneficiaries can be charities or other 501(c)(3) organizations

As a means of creating a legacy, some policyholders may choose to designate a charity or other organization as their beneficiary. On some products, a policyholder can even elect to use certain options like a charitable benefit rider, which automatically provides a payout to the charity of their choice above and beyond the beneficiary payout.3