Tennessee Insurance Practice Exam

What is a method for distributing a life insurance policy's death benefit other than through a lump-sum payment called?

1. Settlement Option

2. Beneficiary Allocation

3. Death Benefit Option

4. Policy Distribution Plan

The correct answer is: Settlement Option

A method for distributing a life insurance policy's death benefit other than through a lump-sum payment is known as a settlement option. Settlement options allow the beneficiary to receive the death benefit in various forms that may better suit their financial needs or preferences. Common settlement options include receiving the benefits as an annuity, where payments are made over a specified time period, or through interest payments that provide the beneficiary with ongoing income rather than a single payment. Using settlement options can also be beneficial for tax planning purposes, as the payout structure may have different tax implications when compared to a lump-sum payment. This flexibility helps ensure that beneficiaries can manage their financial situation in a way that aligns with their immediate needs and long-term goals, allowing for better financial planning after the policyholder's death. While the other terms listed, such as beneficiary allocation or death benefit option, may relate to aspects of managing life insurance claims or policy structures, they do not specifically describe the alternative methods for distributing the death benefit like settlement options do.