Life Insurance Proceeds Payable at death****

MR. WATSON: How is my wife going to receive the insurance money if I were to die? There are five ways she can receive the money. These are payout options, or settlement options and they are the decisions of the policy holder. If the policy-owner doesn't chose, the beneficiary can. This is usually the case.

1. Lump Sum - if I die, Lisa can take the money in a lump sum. Is it taxable? Nope. It is about a zillion dollars. Now is it taxable? Still no.
2. Interest only - When I die I want Lisa to receive the interest only for six months. Then I want her to be paid in a lump sum. The interest is taxable, the lump sum is not.
3. Fixed amount - When I die, I want her to get $5,000 a month. They are going to pay her out at a very attractive interest rate. It's going to have a minimum interest rate it can't drop below. Through the years they start paying her a higher interest rate. Will that make the fixed amount higher? NO. It won't change because it's a fixed amount. If the interest rate goes up, they are going to make the payments for a longer period of time.
4. Fixed period - I want her to receive the money over a 20-year period of time. They are going to pay her out at a very attractive interest rate. It can't drop below a certain minimum. But through the years they will start paying her at a higher interest rate. Will it make that fixed period longer? No. The amount will be higher.
5. Life income - How long will she get the money under a life income? The rest of her life, no matter how long she lives.

MR. WATSON: As long as she is putting fog on a mirror, they are going to send her a check.

MR. WATSON: I died and left Lisa $150,000. Lisa is 65 years old. We are going to pay her over her lifetime. Let's approximate a lifetime of 20 years. How did we figure out that her lifetime was 20 years from now? We looked at what kind of table?

ALL: Mortality table.

MR. WATSON: They are going to pay her $150,000, at say 5 percent interest, over a 20-year period of time. That basically works out to be $10,000 a year. Got it? How long will they pay her?

ALL: Until she dies.

MR. WATSON: If she's still living, over 150 years old, is she still getting paid? YES!!!

MAN: That would seem to be the better way to go then.

MAN: What you are saying is, over the 20-year period they are amortizing it to that point, so she gets $10,000. If she lives a hundred years, we are still going to pay out $10,000.

MR. WATSON: But some people have died sooner than their life expectancy. We use that money to pay for those people who live longer. All right?

MAN: I'm good.

A Note: This is really an annuity, discussed in another chapter. An annuity simply takes a sum of money and pays that sum of money out over a certain period of time. In this case the money was from a life insurance policy.

WOMAN: If she needs more than $10,000, can she request more?

MR. WATSON: No. Once it begins to pay out, you can't change it.