Glossary

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.

Also called: life income option, life annuity option

The life income option is a settlement option that uses the death benefit to provide, in effect, an immediate annuity for the beneficiary. Instead of a lump sum, the beneficiary receives fixed payments for as long as they live. Variations include life income with a period certain, which guarantees payments for at least 10 or 20 years even if the beneficiary dies sooner, and joint life income for two beneficiaries.

The payment amount depends on the beneficiary's age and sex and the insurer's settlement option rates. Say, hypothetically, a 65-year-old beneficiary elects life income on a $250,000 death benefit and receives $1,350 a month for life. Under IRC Section 101(d), part of each payment is treated as a tax-free return of the death benefit, spread over the beneficiary's life expectancy, and the rest is taxable interest.

The option protects a beneficiary who might outlive or overspend a lump sum. The drawbacks: the election is usually irrevocable, payments don't adjust for inflation, and a life-only version leaves nothing more if the beneficiary dies early. It's worth comparing the policy's settlement rates with immediate annuities sold on the open market, which may pay more. See life insurance payout options: lump sum, installments and annuities and single premium immediate annuities.

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. Period certain An annuity payout feature that guarantees payments for a set number of years, paying a beneficiary if the annuitant dies before that time is up. Life-only annuity An annuity that pays income for one person's lifetime and stops at death, with no refund or payments to heirs, in exchange for the highest payout. 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. 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.

Related guides

Income replacement: the 10x rule and better ways The 10-times-salary rule is easy but blunt. How to size income replacement properly: net pay, the right number of years and a realistic return. 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.