Life Policy Options

Question 1

Life Policy Settlement Options

Answer 1

Life insurance benefits are paid in a lump sum unless another mode of settlement has been selected. A settlement option directs the insurance company how to pay out the death benefits.

The choice of a settlement option may be made by the policyowner if the insured is living or by the beneficiary if the insured is not living and no option has been previously selected. If the owner has selected a settlement option, a beneficiary cannot change that option.\

Principal payments of the death benefit that are made after an insured’s death are not taxable as income. However, any interest received from a settlement option distribution is taxed as ordinary income. Benefits paid in a lump sum are income tax free

Question 2

Interest Only

Answer 2

The death benefit proceeds may be left with the insurer while interest payments are paid annually or more frequently. The principal amount does not decrease, and the interest generated is taxed as ordinary income when paid to the beneficiary. This method of providing income is known as capital conservation

Question 3

Fixed Amount

Answer 3

Payments are for a specified dollar amount paid monthly until the benefits along with interest are exhausted.

Question 4

Fixed Period

Answer 4

Payments are guaranteed for a specified period of time, such as 10 or 20 years, after which time payments will cease.

Question 5

Life Income Option –

Answer 5

This option allows the insurer to use the death benefit to purchase an annuity on behalf of the beneficiary.

Question 6

Straight Life (Pure or Life Income Only)

Answer 6

Payments are guaranteed for the lifetime of the recipient. Upon death, payments will cease. The dollar amount of each payment will depend upon the age and gender of the recipient. This is an example of a single life option since payments will not be made to anyone other than the original recipient.

Question 7

Life Income Period Certain

Answer 7

Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer.

Question 8

Life Refund

Answer 8

Payments are made for the lifetime of the recipient. Upon death, if a recipient has not received an amount equal to the total death benefit, the balance is refunded to the beneficiary either in a lump sum called the a Cash Refund Option, or in installments, as in the Installment Refund Option.

Question 9

Joint and Survivor Income Option

Answer 9

Payments are guaranteed for the lifetime of 2 or more recipients. Upon the death of the first recipient, payment continues to the survivor(s) until the death of the survivor.
The survivor’s payment may be full (100%), 2/3, or 1/2 of the original payments.

Question 10

Joint Life Income Option

Answer 10

Payments are guaranteed to 2 or more recipients until the first recipient dies, then all payments cease.

Question 11

Nonforfeiture Options (Guaranteed Values)

Answer 11

These options are found in policies that accumulate cash values and protect the policyowner against a total loss of benefits if the policy lapses due to nonpayment of premium or is intentionally cancelled.

Question 12

Cash Surrender

Answer 12

Upon surrendering the policy back to the insurer, the policy owner will receive the cash surrender value stated in the policy less any outstanding loans and accrued interest.

Question 13

Reduced Paid-Up

Answer 13

Present cash value is used to buy a single premium permanent policy with a reduced face amount. This is considered paid-up policy since there are no additional premiums required. This option provides the longest period of coverage provided by a nonforfeiture option. Coverage, although reduced in face value, will continue to age 100.

Question 14

Extended Term

Answer 14

Present cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy, expressed as a combination of years and days. This option provides the largest death benefit and is sometimes referred to as the Automatic (or Default) Option if no other option has been selected. The insured no longer has rights to the cash value under this option

Question 15

Dividend Options

Answer 15

Dividends are available on participating policies issued by mutual insurers. They are paid annually, if declared, and cannot be guaranteed. Since dividends are essentially a return of excess premiums paid, they are not taxable as income until all of the premiums paid-in have been recovered. Should the total accumulation of dividends exceed the total premiums paid, the excess amount is taxable as ordinary income.

The policyowner decides which dividend option is in effect and can change the election at any time.

Question 16

Cash

Answer 16

he policyowner receives the declared dividends in the form of a check on or near each policy anniversary.

Question 17

Premium Reduction

Answer 17

Dividends are applied toward the next premium due. The same could be accomplished if the policyowner received the dividends in cash and remitted the full premium. If the declared dividends equal or exceed the premium, the premium payment may be suspended.

Question 18

Accumulate at Interest

Answer 18

The dividends are retained by the insurer and the interest rate paid to the policyowner is compounded annually.

Question 19

Paid-up Additions

Answer 19

Purchases single premium, additional permanent benefits at the insured’s attained age. The additional insurance is paid out in addition to the face amount if the insured dies. While the insured is living, it generates cash value and dividends as if the paid-up additional benefit was part of the original policy.

Question 20

1-Year Term

Answer 20

Purchases a single premium, 1-year term benefit. Premiums are calculated at the insured’s attained age; this is also referred to as the fifth dividend option.

Question 21

Paid-up Option

Answer 21

Pays off the policy more quickly than scheduled. If the company’s overall performance declines, premiums may have to be resumed.