When I talk about disbursement options, I am talking about the different ways life insurance companies can pay out your benefit payment(s). I will discuss the following disbursement methods: lump sum, payment for a guaranteed period, payments for life, payments of a specified amount, and interest only payments. There are minimum requirements for any option other than lump sum payments, so check with your insurance company or policy contract for those requirements. Also, if you are going with any option other than lump sum payments, talk to your tax advisor about the consequences of accumulating interest.
- Lump sum is the least technical method. It also happens to be the default method if an option isn’t selected. Lump sum is going to be the desired method for the majority of people. If you fall within that group, then sit back and do nothing–you’re set. Besides the obvious advantage of getting all your money at once, there is also the tax advantage of no interest (or very little interest if the claim is contested).
- Payments for life provide equal monthly payments for a guaranteed period, and then for life. It basically annuitizes the life insurance benefit for a period certain.
- Payments of a specified amount breaks up the total benefit into monthly, quarterly, semiannual, or annual equal payments. A minimum amount of interest is applied.
- Payments for a guaranteed period provide equal monthly payments for the number of years elected.
- Interest only payments are self explanatory. The interest only payments are for a set number of years and they cannot go beyond the lifetime of a beneficiary. A minimum amount of interest is applied.
You might be wondering why anyone would select a life insurance disbursement option other than lump sum. Perhaps a beneficiary is inclined to overspend if too much money is given out at once. Another advantage is the interest rate, which is better than anything at a bank. Don’t hesitate to contact us with any questions.