Sorting Out Insurance Death Benefits

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Insurance benefits paid out at the time of the insured's death can be distributed in one or more of the following ways to one or several beneficiaries. Several options on the manner of paying a death settlement are usually offered, and a choice can be made while the insured person is living, or it can be left for the beneficiary to choose. The usual options are these:

1. The company pays the entire death value promptly in one lump sum.

2. The company keeps the entire death value until the beneficiary withdraws it, and meanwhile it pays interest.

3. A fixed amount is paid at regular intervals until the death value plus accrued interest is exhausted.

4. Payments at regular intervals are spread over a specified number of years, the fixed amount per payment being set at the figure that will exhaust the death value, plus accrued interest, at the end of the stated period of years.

5. An annuity: a fixed amount is paid at regular intervals as long as the beneficiary lives.

6. Combinations of these options can be arranged for one or more beneficiaries.

As far as the scheduling of payments is concerned, these options offer a choice to suit most anyone's desires. The same options generally are available also when an insured person, without waiting to die, surrenders his policy.

The big drawback in these settlement options is that they are all fixed-dollar amounts, and the interest rate included in them is around two or three percent. When life insurance comprises all or most of a man's estate, at his death his dependents are going to receive an inheritance that will be badly out of balance, with both a low income and no protection against inflation, either before or after his death. The reasons why a family's capital should not be all or mostly in fixed-dollar investments are discussed in other chapters.

Of course a beneficiary receiving a cash settlement can use it to buy common stock or other equities. For fear of a drop in price, a large portion of one's capital should not be put into common stock at one time. It is safer for a stock-buying schedule to be spread over at least five years. So the inheritance of a big wad of cash may be a poor substitute for an equivalent amount of money already invested in stock that was bought gradually.

It is possible to arrange for death settlement to take other forms than the options offered by a life-insurance company. When a home or other real estate is mortgaged, life-insurance proceeds can be used to pay off the remaining balance of the mortgage, thus lifting this worry from a dependent's shoulders. Also, real estate being an equity, this arrangement gets away from fixed-dollar settlements.

Another possibility is to use life insurance to guarantee completion of a program of buying shares in a mutual-fund type of investment company. A stock buyer so desiring can obtain life insurance through the mutual fund. If he dies, his estate receives a certificate for so many shares of stock, including those bought with the proceeds of his insurance.

No matter how you choose to have your insurance company pay out benefits upon your demise, it is important to select a policy that is right for you and offers the maximum benefit to your family.

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