Interest only settlement option explained
Under the interest only settlement option, the insurer keeps the death benefit and pays the beneficiary the interest it earns, at a guaranteed minimum rate. The principal stays intact and is paid later to the beneficiary or to another payee.
Key facts for the exam
- The insurer retains the death benefit and pays the interest at a guaranteed minimum rate; the principal is neither used up nor forfeited.
- It fits a beneficiary who wants income now with the capital preserved for someone else, such as her children. Fixed period and fixed amount use up the principal.
- The interest is taxable to the beneficiary as it is received; the tax exclusion covers the death benefit, not the earnings on it.
- Fixed period pays the proceeds plus interest in equal installments over a chosen number of years.
- Fixed amount pays a set installment for a known monthly need, and the number of payments follows from it.
The trap. The death benefit is generally free of income tax; the interest paid under this option is not.
How the exam asks about it
- How does the interest only settlement option work?
- A widow wants income now but the capital preserved for her children. Which settlement option answers that?
- How is the interest paid under the interest only settlement option treated for tax?
- A beneficiary wants equal installments of proceeds and interest for a selected number of years. Which settlement option fits?
- Which need does the fixed-amount option meet better than the fixed-period option?
Where it sits on your state's exam
| State exam | Share of exam | ≈ Scored questions | Outline section |
|---|---|---|---|
| Texas | 19% | 15 of 80 | Policy Riders, Provisions, Options, and Exclusions |
| New York | 20% | 20 of 100 | Life Insurance Policy Provisions, Options, and Riders |