A Lump Sum Settlement Might Not Always Be Wise With Life Insurance

Life insurance seems to be a relatively simple concept. You worry about the safety and security of your family in case you suffer an untimely early passing. To be sure your family is able to keep itself afloat financially, a life insurance settlement is issued. The funds from the settlement can be used to cover the costs of a mortgage, a business, college tuition and other expenses.

Of course, your family does have to effectively manage the funds issued to it. Not everyone is capable of doing this. For those that take out an insurance policy and wish to protect the assets of their family, it may be best to not sign onto a policy that offers a lump sum payment. Instead, it would be wise to have the policy pay out the settlement over an extended period of time. A common misconception is that life insurance settlements solely come in the form of lump sums. Again, that is not accurate. Payments can be distributed over time.

There are different ways such a distribution can be made. A simple example of this would be a $300,000 life insurance payment being distributed over the course of six years. This means each year, $50,000 would be issued. Of course, different variations of annual distributions can be made. Devising the specifics of the distribution is something the policyholder will have to work out with the actual life insurance company. Generally, it should not be very difficult to set up the particular specifics of the policy distribution sought after.

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Why Avoid a Lump Sum Settlement

Questions may arise why anyone would wish to set up a partial distribution as opposed to a lump sum. In some cases, this can make management of the funds easier for the beneficiaries. And, as much as we would not like to think or say so, the truth is there are beneficiaries that just might not be able to manage money well. If they were to receive the full amount of the life insurance settlement, they might end up spending the money on things that are not necessarily essentials. This can leave them in a very difficult situation that can cause an enormous amount of trouble. To avoid this, a yearly distribution for a set amount of time might be able to prevent such a disastrous scenario from emerging.

This is not so say that offering such yearly distributions will automatically eradicate the potential for any problems emerging. No one would ever say that would ever be guaranteed not to be the case. However, a lot of problems can be reduced when a complete lump sum is not issued and a partial distribution is offered instead.



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