Under a life income settlement option, the beneficiary:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The life income option, a straight life settlement option, provides periodic payments that continue for the beneficiary's entire lifetime, guaranteeing income no matter how long the beneficiary lives. The risk that the beneficiary outlives the proceeds is transferred to the insurer, which uses mortality assumptions to fund the payments. This option is well suited to a beneficiary who needs dependable lifetime income rather than a lump sum. It is one of the recognized settlement options, along with lump sum, fixed amount, fixed period, and interest only. Payments under the life income option are largely a return of principal and are partially income tax free.
Why the other options are wrong
- A single lump-sum payment is the default settlement method under which the full proceeds are paid at once; it is not the life income option.
- Paying only interest while retaining the principal describes the interest-only option, under which the principal is preserved and later paid out.
- Payments for a fixed number of years describe the fixed-period option, which guarantees income only for a set time and not for life.
Memory hook
Life income = income for a lifetime, however long it turns out to be. The insurer carries the longevity risk.