What Is a Life Income Joint Settlement Option?

If you have a life insurance policy with a death benefit, the funds can help provide for your loved ones after you pass away. Typically, your beneficiaries can choose from a variety of settlement options to decide how to receive the money. A life income joint settlement option is one potential choice — it provides guaranteed lifetime payments for two people of your choosing.

How Does a Life Income Joint Settlement Option Work?

If your beneficiaries choose a life income joint settlement option, the insurance company sets up a contract with both people. This contract specifies how much money the two beneficiaries receive while they're both alive; it also sets the payment amounts for the surviving person after one beneficiary passes away.

The payments for this settlement option depend on a few factors:

• The size of the policy
• Beneficiaries' ages and genders
• Beneficiaries' life expectancies
• Expected interest rates

Keep in mind that not all life insurance providers offer a life income joint settlement option; if it's something you'd like to provide to your heirs, it's important to check before you purchase a policy. Some providers may refer to this type of settlement as a "joint and survivor annuity."

Factors To Consider in a Life Income Joint Settlement Option

Every insurance provider sets its own terms for a life income joint settlement option. Before your beneficiaries choose this type of settlement, it's important to understand the factors that affect payments and payout timelines.

• Death of one beneficiary: In some life income settlements, each beneficiary receives a certain amount of money. When one person dies, their payment goes to their named heir or the other beneficiary, depending on the terms of the contract.
• Payment reductions: Some joint life income agreements are set up to deliver larger payments while both beneficiaries are alive. After one person dies, the payments may be reduced; typical reduction factors are 50% or 75%. In some cases, the provider will allow beneficiaries to choose different reduction factors. This can be convenient if one person requires a larger income.
• Life income joint settlement option guarantees: In some cases, your insurance provider may offer a lifetime income with a "period certain." This means that the provider guarantees full payments for a set period of time — up to 30 years, in some cases. If one of the beneficiaries dies during that period, the surviving person will continue to receive full payments. After the period ends, the surviving beneficiaries' payments are reduced by the amount set out in the contract. Shorter guaranteed periods usually translate to higher payments, particularly if the period is lower than the beneficiaries' life expectancies.
• Death benefit for joint beneficiaries: In some cases, your beneficiaries can elect to leave the remaining value of the account as a death benefit for the people of their choosing. This typically applies when both beneficiaries pass away during the guaranteed period. Death benefits are not available from all providers or for all settlements; your insurance company can provide more information about terms and payout options. You might also see this called "life income with refund."
• Taxes: When your beneficiaries receive payments, they won't usually need to pay income taxes on the death benefit itself. However, they will need to pay income taxes on the interest the death benefit earns.

Pros and Cons of a Life Income Joint Settlement Option

A life income joint settlement option is one way to help your beneficiaries manage the money in the death benefit. By providing periodic payments instead of a lump sum, it creates a predictable income stream for life. This makes it easier to plan for expenses, stay afloat in case of unemployment and manage retirement finances.

Once a death benefit starts paying a lifetime income, the money in the account continues to earn interest over time. Depending on the age of your beneficiaries, this could mean that the sum of the payments is greater than the initial death benefit.

There are drawbacks to this arrangement, too. If your beneficiaries are young, they'll receive smaller payments. Since most insurance providers don't allow changes to the payment agreement once it's finalized, there's no way to access larger sums for emergencies or major purchases.

Can You Limit Beneficiaries to a Life Income Joint Settlement Option?

Your life insurance provider may allow you to choose the settlement option for your death benefit. If this is the case, you can specify in the contract that the money must be paid out in a life income joint settlement option. You might do so to reduce arguments between beneficiaries or to ensure that each person gets their fair share. It's also an option if you aren't confident in your beneficiaries' ability to manage the money. 

How Is a Life Income Joint Settlement Option Different From Other Settlements?

Joint life income is just one of the available life insurance settlement options that providers offer. Other settlement options include:

• Lump sum: The insurance provider pays out the death benefit in a single lump sum. If you've named one or more beneficiaries, this typically happens soon after your death. As long as it's paid out quickly, the money isn't usually taxed as income. If it has a chance to earn interest, your beneficiaries will need to pay income tax only on the gains.
• Interest only: The insurance provider holds onto the death benefit. As the money earns interest, the provider sends the gains to your beneficiary. Depending on the terms of the contract, beneficiaries may be able to withdraw additional funds as needed. 
• Interest accumulation: As with an interest-only settlement, the insurance provider keeps the death benefit. Interest is added to the balance, where it earns more money. Any time your beneficiary needs additional funds, they can make withdrawals.
• Life income: This option is similar to a life income joint settlement, except that payments go to a single beneficiary. The settlement may include guaranteed payment periods; your beneficiary may also be able to add a beneficiary of their own to receive the remaining balance in case of death.
• Fixed income: With this settlement, your beneficiaries receive a certain dollar amount periodically. Payments continue until the death benefit is gone. The account may also include interest earned and the cash value of the policy, if applicable.
• Fixed period: Your beneficiary receives the death benefit over a specific period of time. Payments may increase slightly to include the interest earned. Beneficiaries may choose this option to help cover temporary costs, such as a mortgage or a college education. Available period lengths vary by insurance company.

Cash Settlement as an Alternative to a Life Income Joint Settlement

In some cases, you may be able to sell the policy to a company in return for a cash settlement. This can be useful if you no longer need life insurance or if you and your beneficiaries need cash immediately. Before you choose a settlement option, it's a good idea to speak to a tax professional to learn about fees, penalties and tax implications.