Two opportunities in the fine print

Few insurance advisors pay attention to the settlement options in their clients’ policies. But you should. Policyholders can actually choose if beneficiaries are paid a settlement with an annuity or in a lump sum.

An annuity settlement means the insurer pays death benefits to a beneficiary in scheduled payments. The policyholder can select specific annuity terms, the payment period, the amount of such payments, and the guarantee periods. Most people feel they can better invest the proceeds of a death benefit claim themselves, rather then leaving it on deposit with the insurance companies, so they don’t choose this option.

There are two reasons why they should.

Peace of Mind

An annuity settlement is a simple and inexpensive method of providing scheduled payments while saving probate and estate fees. There’s also increased privacy and potential creditor protection. It’s an especially good option if beneficiaries are minor children with no investment savvy, or are mentally challenged.

Higher interest rates

Many older policies let policyholders choose between leaving the money on deposit with the insurance company or buying a fixed guaranteed annuity with the proceeds. The rates used in settlement-option scenarios are fixed within the contract.

Here’s the kicker: those rates were fixed when interest rates were close to double digits. So back then, the insurance companies had no qualms about guaranteeing rates at a then—conservative 3% to 5%. With today’s interest rates hovering around 1%, those guarantees are unmatched.

Top five…

Global insurers by net premiums written

• AXA S.A., France

• Assicurazioni Generali S.P.A., Italy

• UnitedHealth Group Inc.,United States

• Allianz SE, Germany

• Japan Post Insurance Co., Ltd., Japan

So before your client dies, check the settlement options and see if it makes more sense for his or her beneficiary to leave all or a portion of the funds on deposit. While you’re at it, consider purchasing an annuity for the beneficiary using the built-in settlement option rates.

Finally, before your client surrenders a policy, check to see if the definition of proceeds includes a cash surrender value.

It might be a good idea to surrender and leave some of the funds on deposit.

Warning

Policyholders must choose the annuity settlement option before they die. Insurers will not let a beneficiary choose the option after the insured’s death.