Life Insurance - Settlement Options and Illustrations
SETTLEMENT OPTIONS Death proceeds of a life policy can be paid out in five different options: lump-sum, fixed amount, fixed period, interest only, and life income.
a. Lump-sum - Although this option is still available it is not used as frequently as the others.
b. Fixed amount - Policy proceeds plus interest are used to pay out a specified amount of income at regular intervals until the proceeds are exhausted.
c. Fixed period - Provides for equal payments of an amount that will exhaust the principal and interest by the end of the fixed period.
d. Interest only - Provides that the insurance company hold the death benefit in trust for a specified time, while the interest earned on the proceeds is paid to the beneficiary at stated intervals. The death proceeds are then payable under a life income plan.
e. Life income - Essentially the insurer uses the death proceeds to purchase a SPIA, even if the principal is depleted the income payments continue as long as the beneficiary is alive.
Definition: An illustration is a presentation that shows theoretical policy performance based on both guaranteed and non-guaranteed basics of a life insurance product over a given time frame. Illustrations demonstrate how a life insurance product works and how policy values (premiums, dividends, cash values, death benefits, etc.) accumulate under the current dividend schedule, which is not guaranteed, and may change over time. These are based on certain expectations of what will or might happen. When premiums, rates of returns and death benefits are fixed, this is not a problem. However, when these become variable, the projected numbers are not guaranteed.
Are illustrations a good way to predict future performance?
No, illustrations should not be used to project future performance or as a means to compare products. Dividend performance may change over time. Since future policy values almost certainly will be different from those illustrated, illustrations of dividends and non-guaranteed values are not intended to be and should not be used as "estimates" of future performance. Professionals are strongly encouraged to use illustrations based on dividend interest rates one or two percentage points below the current rate to see how policies would react to changes in dividends, especially when illustrating situations that are particularly sensitive to dividend schedule changes.