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Life Income Option

What is a Life Income Option?

A life income option, also called a lifetime income option, is a life insurance payout option that gives the beneficiary regular, appropriately sized payments for the remainder of their life rather than a single lump-sum payment.

How life insurance settlements work

Life insurance is designed to kick in when the worst happens: you lose someone important in your life. If that individual had life insurance and named you as a beneficiary of that policy, you can expect to get money from their life insurance provider.

Historically, life insurers paid out their death benefits as a lump sum. That can create a challenge, though. The windfall of cash can be hard to manage, adding stress in an already stressful time. It’s not uncommon for people to spend the lump sum too quickly, then find themselves struggling without the money that was meant to provide for them for life.

To alleviate this, insurers now offer different types of life insurance settlements. They might break up that payout and make payments to the beneficiary for a set amount of time, for example.

Or, if the beneficiary wants to ensure that they have sufficient cash flow for the remainder of their lifetime, they can choose a life income option.

How life income options work

If you opt for a life income payout, the insurer calculates how much you should receive per installment based on your current age. Essentially, using your life expectancy, they determine how best to distribute the money from your life insurance settlement over the remaining years of your life.

You also need to determine how regularly you would like the payments. Most insurers offer life income payments on the following schedules:

  • Monthly

  • Quarterly

  • Semiannually

  • Annually

Using your life expectancy and the payment frequency you choose, the life insurer runs the numbers. Once their calculations are complete, they inform you how much money you’ll receive in each payment.

From that point on, you can rely on those regular payments to maintain cash flow in your household. Because the income source is guaranteed for your life, you don’t need to worry about outliving the payouts.

That said, a life income option comes with some detriments of which you should be aware before you choose this type of payout.

Drawbacks with life income payouts

For starters, when you choose a lifetime income option, the life insurer locks in a fixed payment for you. Yes, that means you never have to worry about receiving less money — or no money at all — after a certain point. But it also means that your payments won’t scale with inflation. Essentially, over the decades, those payments will become less and less valuable.

The other con of life income payments is even more significant. When you die, the payments stop. That’s true whether you pass away at 90 or the year after the payments first began.

If you’ve wondered why insurers are willing to take on the risk of making payments past when the death benefit would have been expended, this is why. While there’s a chance they may have to pay more, there’s also a chance that they will be able to pocket a significant sum if you pass away early into the payment plan.

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