G. Settlement Options

Settlement options describe the different ways a beneficiary can receive the death benefit after the insured dies, or the ways an insured can receive an endowment benefit upon reaching the endowment date. The policyowner may select a settlement option as early as the initial application, and may change that selection at any time while the insured is alive. Once the policyowner has made a selection, the beneficiary cannot later change it. If the policyowner never selects a settlement option, the beneficiary is free to choose one at the time of the insured's death.

1. Cash Payment (Lump Sum)

Unless a different settlement option is chosen, the contract is designed to pay out the entire death benefit in cash as a single lump sum — and if the beneficiary never makes another selection, this is the option that is paid automatically. As a general rule, a lump-sum payment of the policy's principal face amount is not taxable as income to the beneficiary.

2. Life Income

The life income option, sometimes called straight life, guarantees the recipient an income they can never outlive — payments continue for as long as the recipient is alive, regardless of when that turns out to be. Each installment is sized based on the recipient's life expectancy and the amount of principal being paid out. Because a recipient could live long enough that total payments exceed the original principal, or could die shortly after payments begin and forfeit whatever principal remains, insurers also offer several variations that provide at least a partial guarantee that the principal will be paid out — though each added guarantee reduces the size of the individual installments.

Single Life

The single life option pays one recipient an income for as long as that person lives; payments simply stop when that recipient dies.

Joint and Survivor

The life income joint and survivor option guarantees an income to two or more recipients for as long as either is living. Most contracts reduce the payment once the first recipient dies. That reduced amount is commonly written as "joint and ½ survivor" or "joint and ⅔ survivor," meaning the surviving recipient receives half or two-thirds of what was paid while both were alive. This option is often chosen by a policyowner who wants to provide for two people, such as elderly parents — though unless a period-certain guarantee is also added, there is no assurance that the full amount of insurance proceeds will ever be paid out if both recipients die shortly after payments begin.

Life Refund

The life refund income option comes in a cash-refund form or an installment-refund form. Both guarantee that the entire annuity fund is eventually paid out to the annuitant or the beneficiary. Under the cash refund version, if the annuitant dies before the fund is exhausted, the remaining balance is paid to the beneficiary in one lump sum; under the installment refund version, that remaining balance instead continues to be paid to the beneficiary in ongoing installments.

Life with Period Certain

The life income with period certain option combines a lifetime income with a guaranteed minimum payment period. Payments are guaranteed for as long as the recipient lives, and are also guaranteed for at least the stated period. For example, under a life income with a 10-year-certain option, the recipient is paid for as long as they live; if the recipient dies shortly after payments start, the remaining payments in that 10-year period continue to a named beneficiary. Because of this added guarantee, the individual installments are smaller than they would be under a life-income-only option.

3. Interest Only

Under the interest-only option, the insurer retains the policy proceeds and pays only the interest earned on those proceeds to the recipient at regular intervals — monthly, quarterly, semiannually, or annually. The insurer usually guarantees a minimum interest rate and often pays more than that guaranteed minimum. Because the principal itself is never paid out under this option, it is considered temporary — used until the proceeds are eventually paid in a lump sum or under one of the other settlement options. It is also sometimes chosen as a stopgap when a beneficiary needs time to decide which permanent settlement option to select.

4. Fixed-Period Installments

Under the fixed-period option (also called period certain), the recipient chooses a specific number of years, and equal installments are paid out over that period regardless of whether the recipient lives to see it through — if the recipient dies before the period ends, the remaining payments simply continue to a named beneficiary. The size of each installment depends on the amount of principal, the guaranteed interest rate, and the length of the period chosen: the longer the period, the smaller each installment will be. This option guarantees that the full principal will eventually be distributed, but it does not guarantee income for the recipient's entire life.

5. Fixed-Amount Installments

Under the fixed-amount option, the recipient instead chooses a specific dollar amount to be paid in each installment, and payments continue at that amount until the proceeds (principal plus interest) are fully exhausted. If the recipient dies before the proceeds run out, payments continue at the same fixed amount to a contingent beneficiary until the funds are gone. Because the installment amount is fixed rather than the time period, a larger chosen installment shortens how long the income will last. Like the fixed-period option, this option guarantees that all of the proceeds will eventually be paid out, but does not guarantee income for the recipient's entire life.