Fixed-period settlement option

A settlement option is the method by which a life insurance beneficiary receives the death benefit instead of taking it as a single lump sum. Under the fixed-period option, the beneficiary selects the length of the payout — say ten years — and the insurer calculates the installment amount by spreading the proceeds plus credited interest evenly across that span.

Its mirror image is the fixed-amount option, where the beneficiary picks the payment size and the insurer keeps paying until the money runs out. Remembering which variable is chosen is the whole distinction: in the fixed-period option the period is fixed and the amount varies; in the fixed-amount option the amount is fixed and the period varies. Both are period certain arrangements, meaning payments continue for the full term and any remaining balance passes to a contingent beneficiary if the original beneficiary dies first.

These options differ from the life income options, which pay for as long as the beneficiary lives and therefore depend on life expectancy. Fixed-period and fixed-amount payouts involve no mortality risk to the insurer, so the payments are determined purely by arithmetic and the guaranteed interest rate. Interest credited on the unpaid proceeds is taxable income to the beneficiary, while the death benefit portion is generally received income tax free.

Life insurance licensing exams and the life and health combined exam test settlement options in nearly every state. Be ready to identify the fixed-period option from a description, distinguish it from the fixed-amount option, and place both alongside the interest-only and life income options within a policy's provisions.