How should beneficiaries take the payout?
Beneficiaries of life insurance policies have much to consider in the days following the death of the insured. Not the least of these is the first–and potentially most important–financial decision of all: how the beneficiary receives the payout.
More to the point, which settlement option is most popular?
The overwhelming majority of beneficiaries elect the lump sum option, say sources interviewed. Chief reason: Beneficiaries have an immediate need to replace lost income stemming from the death of the insured. And most don’t have sufficient assets outside–or within–the life insurance policy to support an annuity payout.
“Most people don’t have enough [in assets] that can translate into a substantive monthly income,” says Robert Dehais, vice president of MetLife, New York. “The typical household has a policy death benefit that is less than two times their incomes. And for many Americans, it’s less than one time annual income.”
Adds Naveed Irshed, a vice president of product development at John Hancock Financial Services, Boston, Mass.: “Approximately 70% of clients opt for a lump sum payout; the other 30% leave funds deposited into what we call a signature account that they can draw on as needed.”
That’s just as well, advisors say, because the alternative settlement options–fixed period installments, fixed amount installments, interest-only payments and annuitization–generally are not as attractive because of their relative inflexibility.
For example, a beneficiary who selects a life annuity at $600 per month would be unable to boost payments subsequently to $1,200 per month to meet increased financial needs. Absent a provision in the contract stipulating otherwise, beneficiaries would also get locked into the market interest rate prevailing at the time the settlement option is chosen.
That may be fine when interest rates are high. But when they’re low, as in the current economy, the value of death benefits can be substantially reduced by inflation.
“What some folks don’t understand is that by the time inflation is factored in, a guaranteed income for life annuity that pays $1,000 per month may yield only $500 per month in purchasing power 20 years from now,” says Dorothy Strackbein Koetz, a financial planner and principal at Strackbein & Associates, Woodland Hills, Calif. “If you’re on a fixed income, that makes a big difference.”
To be sure, policyholders can purchase a rider that raises the death benefit in lockstep with inflation. They also can buy riders that guarantee a certain minimum payout. Example: MetLife’s Guaranteed Survivor Income Benefit, an option offered with the company’s new Guarantee Advantage Universal Life insurance policy, is a rider that guarantees beneficiaries 105% of MetLife’s single premium immediate annuity rates. Other options include: take part of the death benefit as a lump sum and part as monthly income; choose both life-only and 10-year certain with life annuity; plus 1%, 2% and 3% cost of living options.