To effectively incorporate insurance into your portfolio, you need to look at it from beyond the long-term investment perspective. This includes understanding how and when life insurance payouts are delivered to beneficiaries. You need to have a clear idea of how quickly benefits will be paid and design the policy with the payout option that works best with your investment planning.
Lump-Sum: The insurance industry is over 200-years old and the payout has always been the lump-sum form of payment. So by default, your payout option that almost all policies provide with be the lump-sum amount unless you choose for the newer possibilities, such as:
Installments: There was an immense amount of enhancement in how life-insurance payouts are delivered today to the policy’s beneficiaries. The installment-payout option or an annuity option is one of the results of these changes. In this option all proceeds and accumulated interest, both, are paid out regularly in intervals, over the life of the beneficiary.
This is an option to provide a selected, pre-determined and guaranteed stream of income. And, many life-insurance owners prefer the installment option because it guarantees that the proceeds will last for the needful number of years.
Pre-death benefits: While life insurance policies traditionally only paid out at the time of the policy holder’s death, over the last few decades, some of the companies in the industry have designed policies where your life insurance becomes an opportunity to help you provide for major milestones of life. Such policy pay-out options allow policyholders to draw against the face-value of the policy. This is beneficial in the event of any terminal, chronic or critical illness. In simpler worlds, this pay out option enables the policyholder to be the beneficiary of their own life insurance policy. This is also known as the accelerated death benefit ride.
Life insurance policies continue to be the best means to get peace of mind for both the policy-holder and their loved ones. However, before choosing a pay-out option, it is crucial to understand your financial needs and then determine which option is best suited. A financial advisor or a tax consultant can help you through the process. Although most payment options are broadly categorized into the above, and are relatively simple and easy to comprehend, it is always wise to spend time on understanding each one thoroughly. The implications of the many sub-categories of pay-out methods can be different. Hence, beneficiaries need to be aware of riders, such as the fact that while the lump-sum benefit of an insurance policy may be tax-free, all interest amounts received on the lump-sum are taxable.