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There are many life insurance questions that come up when someone is either purchasing a policy or the policy beneficiary has to figure out the policy after the insured has passed away.

There are some different ways in which money can be received depending on what the beneficiary wishes. Since 2009 the death benefit that is received by the beneficiary is actually received on a tax free basis. There is only one exception to this and that is in situations in which there is interest paid. The reason for this is that it’s considered taxable income.

The following is some additional information to make a hard time a little easier to get through or if you’re just preplanning the information that you’ll need when that unfortunate time comes.

Beneficiary

When the insured person passes away the proceeds of the life insurance policy are paid to the beneficiary. The beneficiary is the party that’s selected by the insured to receive the monetary insurance benefit when he/she passes away. The beneficiary can be one of three things:

1. Person
2. Corporation
3. Trust

Lump Sum

One of the options for payment is to just receive the death benefit as a lump sum (all at once) payment. Since 2009 this entire face value amount of the policy would be issued to the beneficiary tax free. There is only one exception where the beneficiary wouldn’t receive the entire value of the policy. This exception is where there would have been a loan taken out against the cash value of the policy by the insured and this loan wasn’t repaid back to the policy. If this is the case the amount of the unpaid loan would simply be taken away from the cash value of the policy and the remainder would be paid out.

Installments

There is another option that is often referred to as the “life income” option. This is where instead of a lump sum (all at once) payment the beneficiary can elect to receive the amount of money in installments for the duration of their life.

When this option is taken a formula is going to be used by the insurance company which is in laymen’s terms they basically take the age and the amount of money to be paid out in total to calculate the monthly payments for a specific amount of time which could be 5, 10, 15 or whatever specific amount of time is set. The monthly payments will be made until all of the proceeds are exhausted out.

Joint and Last Survivor Life Income

In this option the beneficiary will select either another individual or an entity that the proceeds will be shared with. Then in the event that the beneficiary dies this second entity or individual is going to get the payments until the full amount is exhausted. The insurance company is going to end payments when that person should die, the entity dissolves or when the proceeds are completely exhausted, whichever comes first.

Specific and Interest Income

The one other option is something called the “specific income” option. What this does is allows the beneficiary to make their own determination on how the proceeds will be distributed. They could for instance decide on a set amount per year.

Should the beneficiary die before the before all the money is exhausted the remaining amount of the money would then go to the second beneficiary. What happens in this “interest income” option is that the initial beneficiary is going to only going to get interest payments on the face amount and then the second beneficiary is going to receive the payments when the first beneficiary dies.