California Life-Only & Accident and Health AgentLife InsuranceMedium
A life insurance policyowner has chosen the 'Interest Only' settlement option for the death benefit. Which of the following statements accurately describes how the beneficiary will receive the funds?
- AThe beneficiary will receive the entire death benefit in a lump sum, with interest paid annually.
- BThe beneficiary receives a fixed income for life, based on the death benefit amount and their age.
- CThe insurer holds the death benefit and pays periodic interest payments to the beneficiary, with the principal paid at a later date.
- DThe death benefit and accumulated interest are paid out in equal installments over a specified period.
Show answer & explanationAnswer & explanation
Correct answer: C. The insurer holds the death benefit and pays periodic interest payments to the beneficiary, with the principal paid at a later date.
With the Interest Only settlement option, the insurance company retains the death benefit proceeds and pays only the interest earned on that principal to the beneficiary at regular intervals. The principal amount is then paid out at a later, specified time or upon a specific event.
Why the other options are wrong
- A. This describes a lump sum payment with separate interest, not the 'Interest Only' option.
- B. This describes a 'Life Income' option, where payments are for life.
- D. This describes a 'Fixed Period' or 'Fixed Amount' installment option, not 'Interest Only'.
Interest Only Settlement Option
A life insurance death benefit settlement option where the insurer holds the principal amount and pays only the interest earned on it to the beneficiary, with the principal distributed at a later time.
- Insurer holds principal
- Beneficiary receives only interest payments
- Principal paid later (e.g., at a specific age or event)
- Provides income without depleting principal
Memory trick: Settlement options are like choosing how your 'money tree' will bear fruit.