California Life-Only & Accident and Health AgentLife InsuranceMedium
A life insurance policy has a face amount of $300,000. The policyowner elects the 'Interest Only' settlement option for the death benefit. If the insurer pays an annual interest rate of 4% on the proceeds held, and the beneficiary receives interest payments for 5 years before requesting the principal, how much total interest will the beneficiary have received?
- A$12,000
- B$15,000
- C$60,000
- D$75,000
Show answer & explanationAnswer & explanation
Correct answer: C. $60,000
With the 'Interest Only' settlement option, the insurer holds the principal ($300,000) and pays out only the interest earned. The annual interest payment is $300,000 x 0.04 = $12,000. Over 5 years, the total interest received would be $12,000/year x 5 years = $60,000.
Why the other options are wrong
- A. This is only the interest for one year, not five years.
- B. This calculation is incorrect; it does not accurately reflect the annual interest multiplied by the number of years.
- D. This calculation is incorrect and significantly overestimates the total interest.
Interest Only Settlement Option
A life insurance settlement option where the insurer retains the death benefit principal and pays only the interest earned to the beneficiary.
- Principal remains with the insurer.
- Beneficiary receives regular interest payments.
- Principal can be withdrawn later, often by the beneficiary's choice.
Memory trick: Lump, Interest, Fixed Time, Fixed Amount: how benefits can be spread out.