What is the primary advantage to a beneficiary of choosing a life income settlement option rather than a lump sum?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The life income option pays the beneficiary a guaranteed income stream for life, eliminating the risk of outliving the proceeds. The payment amount is based on the principal, the interest earned, and the beneficiary's life expectancy; the insurer pools the longevity risk so that payments continue even after the principal is exhausted. This option provides retirement-style financial security but forfeits the lump sum, and payments stop at death unless a period certain or refund feature is added. This longevity protection is especially valuable to a widow or widower who has no other guaranteed income and wants the proceeds converted into a dependable monthly retirement check.
Why the other options are wrong
- B) Preserving principal for heirs is the goal of the interest only option or leaving proceeds unspent; the life income option pays the principal out over time. The principal is distributed over the beneficiary's lifetime under a life income option rather than being held intact.
- C) Naming contingent beneficiaries is a function of the policy's beneficiary designation and does not apply to the life income payout itself. Contingent beneficiaries relate to the policy contract, not to the payout option after the insured's death.
- D) Automatic inflation increases are a COLA feature that must be added separately; a standard life income option does not provide them. No inflation indexing exists in the basic life income option unless a COLA feature is purchased separately.
Memory hook
Life income = a pension-like check that cannot be outlived.