Few insurance advisors pay attention to the settlement options in your policies. But they should. Policyholders can actually choose if beneficiaries are paid a settlement with an annuity or in a lump sum.
An annuity settlement means the insurer pays death benefits to a beneficiary in scheduled payments. The policyholder can select specific annuity terms, the payment period, the amount of such payments, and the guarantee periods. Most people feel they can better invest the proceeds of a death benefit claim themselves, rather then leaving it on deposit with the insurance companies, so they don’t choose this option.
There are two reasons why they should.
Peace of Mind
An annuity settlement is a simple and inexpensive method of providing scheduled payments while saving probate and estate fees. There’s also increased privacy and potential creditor protection. It’s an especially good option if beneficiaries are minor children with no investment savvy, or are mentally challenged.
Higher Interest Rates
Many older policies let policyholders choose between leaving the money on deposit with the insurance company or buying a fixed guaranteed annuity with the proceeds. The rates used in settlement-option scenarios are fixed within the contract.
Here’s the kicker: those rates were fixed when interest rates were close to double digits. So back then, the insurance companies had no qualms about guaranteeing rates at a then—conservative 3% to 5%. With today’s interest rates hovering around 1%, those guarantees are unmatched.
So before you die, check the settlement options and see if it makes more sense for your family to leave all or a portion of the funds on deposit. While you’re at it, consider purchasing an annuity for your family using the built-in settlement option rates.
Finally, before you surrender a policy, check to see if the definition of proceeds includes a cash surrender value.
It might be a good idea to surrender and leave some of the funds on deposit.
This article was originally published on capitalmagazine.ca.