Weighing The Merits Of Settlement Options

Koetz cautions, however, that riders offering such guarantees can be expensive, particularly in cases where the insurer pays agents a commission on the sale. (The MetLife option typically entails a 5% increase in premium payments, according to Dehais.)

Also, the timing of a rider’s election varies from carrier to carrier. Some firms, observes Koetz, permit the beneficiary to select the rider at any time over the life of the contract. Others permit the addition only at policy anniversary. And still others require the election when the policy is originated.

Guarantees notwithstanding, experts say annuitization and interest-only options make sense in certain circumstances. Koetz cites minor beneficiaries who may not be sufficiently mature to handle a lump sum payout. The same applies to adults who, prone to “sudden wealth syndrome,” fail to manage death benefit proceeds responsibly.

“When there is no financial plan in place, taking a lump sum is not the right thing to do because [beneficiaries] are likely to blow through the cash in a short period, believing the payout to be bigger than it really is,” says Michael Kresh, a financial planner and president of M.D. Kresh Financial Services, Islandia, N.Y. “But if there is a plan, then a lump sum distribution makes the most sense because it allows for greater flexibility.”

Koetz agrees, adding that one option that’s popular among her conservative clients is the “ladder portfolio.” Beneficiaries, she says, can place death benefit proceeds into multiple certificates of deposit that mature according to a staggered schedule (e.g., every six months, annually and every three years, respectively), thus permitting the CD holder to shift assets as market conditions warrant. Investors who have a greater tolerance for risk can tap other vehicles, such as mutual funds and equities.

That assumes the beneficiary’s lump sum doesn’t first fall prey to predators. Dehais cites the case of the widow of a man who died in the World Trade Center attacks on 9/11. Within a few years, 90% of the $5 million in proceeds she received from her husband’s insurance policy, plus lawsuit payouts and government benefits, was lost to swindlers. Given the widow’s “volatile state of mind,” the widow might have been able to better protect herself by keeping the assets with the insurer.

Sometimes, however, it’s the insurer who the grieving survivor should be wary of. Kresh points to insurance agents who met with two widowed clients of his, ostensibly to hand each a checkbook that could be used to secure the full death benefit. Their real aim, says Kresh, was to persuade the clients to convert the proceeds to annuities.

“If the agent of record [at the time of the policy sale] is still the client’s life insurance representative at death, then discussing annuity options with the client seems reasonable,” says Kresh. “But once the original agent is gone and the client communicates that she has another advisor, then the client’s wishes–receiving the full benefit–should be respected. She shouldn’t be forced to see another salesperson at a time when she’s not emotionally capable of making this decision.”

This article originally appeared in the October 2005 issue of Registered e-Report, an online publication of National Underwriter Life & Health. You can subscribe to this monthly e-newsletter for free by going to www.lifeandhealthinsurancenews.com.

Some alternatives to lump sum payouts are generally not as attractive because of their relative inflexibility

‘When there is no financial plan in place, taking a lump sum is not the right thing to do because [beneficiaries] are likely to blow through the cash in a short period’