Under the interest-only settlement option, the insurer:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under the interest-only option, the insurer retains the death proceeds as principal and periodically pays the beneficiary the interest the funds earn. The principal remains intact and is paid out later, either when the beneficiary elects another settlement or on a specified date. This option provides a steady income stream while preserving the full death benefit for future distribution, and the interest received by the beneficiary is taxable as ordinary income. The arrangement is attractive to beneficiaries who want current income without consuming the underlying death proceeds.
Why the other options are wrong
- B) Immediate payment of the entire principal describes the lump sum option. Under interest only, the insurer keeps the principal and pays only the earnings it generates.
- C) Paying out principal and interest in installments until the funds are exhausted describes the fixed amount or fixed period options, both of which consume the principal over time. Interest only never touches the principal during its term.
- D) The proceeds belong to the beneficiary under the contract, not to the insured's estate. The insurer would return them to the estate only if the beneficiary were deceased and no contingent beneficiary existed.
Memory hook
Interest only = the pot stays with the insurer and pays you the interest as income.