Glossary

Interest-only settlement option

A payout choice in which the insurer holds the death benefit and pays the beneficiary only the interest it earns, leaving the principal for later.

Also called: interest option, interest-only option

The interest-only option is one of the traditional settlement options in a life insurance policy. Instead of paying the death benefit at once, the insurer keeps the proceeds and pays the beneficiary interest on them monthly, quarterly or yearly, at a guaranteed minimum rate or higher. The principal stays with the insurer until the beneficiary withdraws it, a set date arrives, or the beneficiary dies and it passes to a named successor.

Say, hypothetically, a beneficiary leaves $300,000 with the insurer at 3% interest: they receive about $9,000 a year, or $750 a month, and the $300,000 remains intact. The death benefit itself is generally income-tax-free, but the interest payments are taxable income to the beneficiary.

The option can give a grieving family time to decide what to do with a large sum, and some policy owners choose it in advance to keep a young or inexperienced beneficiary from spending the principal. The drawbacks: the guaranteed rate may be lower than what the money could earn elsewhere, and withdrawal rights vary by contract. Compare it with a lump-sum payment invested on your own. See life insurance payout options: lump sum, installments and annuities and retained asset accounts: the checkbook you didn't ask for.

Last reviewed October 4, 2026

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Related terms

Settlement options The ways a beneficiary or policy owner can receive life insurance proceeds: lump sum, installments, interest only or lifetime income. Lump-sum payment Receiving an entire life insurance death benefit at once in a single payment, the most common way beneficiaries choose to be paid. Life income settlement option A payout choice that turns a death benefit into guaranteed payments for the rest of the beneficiary's life, sometimes with a minimum number of years. Beneficiary The person, trust, charity or estate named to receive a life insurance death benefit or an annuity's remaining value when the insured or owner dies. Death benefit The money a life insurance policy pays to the beneficiaries when the insured dies, usually the face amount adjusted for loans, riders and dividends.

Related guides

Life insurance payout options: lump sum, installments and annuities How beneficiaries can take a death benefit: lump sum, retained asset account, interest only, installments or lifetime income, with the tax on each.