Choosing Death Benefit Payment Options

Authority to Choose and Immediate Payout Methods

Settlement options determine how the insurer distributes death benefit proceeds to a beneficiary. The policyowner can select a settlement option while the insured is alive. If the policyowner selected an irrevocable settlement option before death, the beneficiary cannot change it. However, if the policyowner has not chosen a settlement option, the beneficiary can generally choose from the options the policy makes available.

If no other settlement option is chosen, the insurer generally pays the death benefit in a cash lump sum. A lump-sum settlement pays the entire death benefit in one payment after the insurer approves and processes the claim. A lump-sum death benefit paid to a beneficiary is generally received free of federal income tax.

Alternatively, an insurer may offer a retained asset account. A retained asset account is an interest-bearing account created by the insurer to hold death benefit proceeds for a beneficiary. An insurer may give the beneficiary drafts or other means to withdraw funds from a retained asset account. Proceeds left in a retained asset account earn interest until they are withdrawn by the beneficiary.

There are two key distinctions to keep in mind regarding retained asset accounts. First, interest credited to a retained asset account is generally taxable to the beneficiary as ordinary income in the year it is credited. Second, retained asset accounts are not bank checking accounts and are typically not covered by FDIC insurance.