Life Insurance Settlement-Option Calculation Questions

A life insurance beneficiary can receive proceeds in a lump sum or under an available settlement option. Fixed amount generally describes a payment amount until proceeds and interest are exhausted; fixed period describes a term over which value is paid. Interest-only leaves principal with the insurer while interest is paid under contract terms. Life income provides payments measured by a recipient’s lifetime and may include guarantees. The problems below deliberately state simple assumptions, especially when ignoring interest, so arithmetic can be checked. Actual policies and settlement quotes can use other factors. Questions are original study cases, not recalled exam items.

Question 1: fixed amount, no interest

Question 2: fixed period, no interest

Question 3: interest-only monthly payment

Question 4: interest-only balance after a year

Question 5: compare fixed amount with fixed period

Question 6: calculate total fixed-period payments

Question 7: choose life income with a guarantee

Question 8: principal plus interest over fixed period

Question 9: fixed amount with partial payment

Question 10: income-only option and beneficiary access

Calculation method and common traps

Use the wording to select the equation. Fixed amount with no interest: principal divided by payment equals number of payments. Fixed period with no interest: principal divided by months in term equals payment. Interest-only: principal multiplied by annual rate gives annual interest, then divide by payment periods if the rate and schedule support that calculation. Life income cannot be computed from principal alone; use the insurer’s stated quote or factors.

Do not mix gross death benefit with net proceeds after a policy loan, assignment, or claim adjustment. Do not presume a fixed option’s interest rate stays constant unless guaranteed. A beneficiary can receive principal and interest under different tax rules. IRS guidance generally treats life insurance death proceeds differently from interest paid on retained proceeds; the settlement format can matter. Use current IRS materials and the carrier’s tax reporting for a real beneficiary.

These are original examples based on the Texas Life Agent outline and TDI descriptions of settlement choices. They are not actual Pearson questions. The calculations label assumptions because insurer settlement options can use interest, guarantee periods, age, and other contract terms. When a stem omits a rate or actuarial factor, identify that an exact amount cannot be calculated instead of inventing one.

Convert each option into a payment stream

Fixed-period and fixed-amount options reverse the known input. With a fixed period, the insurer estimates the monthly amount for a stated duration; with a fixed amount, the beneficiary selects a monthly payment and the insurer determines how long the proceeds support it. A life-income option instead depends on actuarial assumptions and the payee’s life. The exam may simplify interest or omit it, so follow the stated model rather than importing a real carrier’s payout factor. If interest is expressly ignored, multiply monthly amount by months for a fixed period; do not apply an unstated discount rate.

Check arithmetic and units in a table

Before selecting an answer, write the unit beside every number. A $725 monthly payment for 96 months equals $69,600 in nominal payments: 725 × 96. That result is not necessarily the present value, account balance, or amount the beneficiary can withdraw immediately. If the choices use annual figures, convert months to years first; 96 months is eight years. A common distractor multiplies by 12 twice or treats eight years as 96 years. Label the result as nominal total installments when the question leaves out interest and timing adjustments.

Read refund guarantees separately from income duration

A period-certain guarantee means payments continue for a minimum stated period even if the payee dies during that period; a cash-refund feature pays a specified balance under its terms. A life-only option may pay more per month because it has no guarantee after death. These features change who receives remaining value, not just the monthly amount. A joint-and-survivor election can continue at a full or reduced percentage to a second annuitant. Do not treat “life income” as a guarantee of principal recovery unless a refund or period-certain provision is expressly stated.

Explain the insurer’s quote assumptions

Real settlement-option quotes use actuarial and interest assumptions, payment timing, age, and selected guarantees. A classroom problem may provide a ready-made table, in which case look up the row and column requested and do not invent an independent mortality factor. Confirm whether the table assumes monthly payments in arrears, whether the principal is exhausted, and whether a beneficiary can change the election after it becomes effective. For a real claim, obtain the insurer’s written election forms and compare the guaranteed and non-guaranteed features before signing; the beneficiary’s tax result depends on the policy and payment form.

Check each distractor before committing

A useful final check is to ask whether the proposed answer preserves the option’s defining feature. If a fixed-period question gives a term, the answer should produce a duration; if a fixed-amount question gives a monthly amount, the answer should solve for duration or remaining value. A life-only choice depends on survival and may stop at death, while a period-certain choice protects a minimum period. If two choices contain plausible arithmetic, eliminate the one that answers a different question, such as present value when the stem asks for nominal installments.