A beneficiary chooses a settlement option that will pay income for as long as the beneficiary lives, with payments ceasing at death. This option is:

Why A is correct

The life income option guarantees payments for the beneficiary's entire lifetime; payments stop when the beneficiary dies. This creates the risk that the beneficiary may die early and receive relatively few payments, but it is the only settlement option that provides a true lifetime income guarantee. The fixed-period option pays over a stated number of years regardless of lifespan, the interest-only option pays only the earnings on the principal while preserving it, and the lump-sum option pays the entire proceeds at once.

Why the other options are wrong

• B) The fixed-period option pays equal installments over a set number of years and stops at the end of the period, regardless of the beneficiary's lifespan.
• C) The interest-only option pays only the interest earned on the proceeds and preserves the principal for a later payment.
• D) The lump-sum option pays the full proceeds in one payment and provides no ongoing income stream at all.

Memory hook

Life income = a paycheck for life. Die early and it ends; live long and it keeps coming.

Why A is correct

The life income option converts the death proceeds into a stream of income payable for as long as the beneficiary lives, using life expectancy to determine the amount of each payment. Because payments continue for the beneficiary's entire lifetime, this option protects against outliving the proceeds, similar to an annuity. The amount of each installment is fixed at election based on the principal, the guaranteed interest rate, and the beneficiary's life expectancy, and payments generally stop at the beneficiary's death. It is the settlement choice that guarantees the beneficiary can never outlive the income.

Why the other options are wrong

• B) A fixed number of years describes the fixed-period settlement option, under which payments stop when the stated term ends. Life income has no fixed term; it is tied to the beneficiary's life.
• C) A single lump-sum payment is the lump sum option, which ends the insurer's obligation immediately. Life income converts the proceeds into an ongoing stream of payments instead.
• D) The amount of each payment is determined when the option is elected and does not fluctuate with market interest rates. Current rates do not govern whether payments continue.

Memory hook

Life income = payments that outlive you cannot happen, because they last your whole life.

Why B is correct

The life income option pays the beneficiary a periodic income that continues for the rest of the beneficiary's life. The insurer guarantees the payments will last as long as the recipient lives, regardless of how long that is, which shifts the risk of outliving the money to the insurer. The payment amount depends on the principal, the beneficiary's age and sex (where permitted), and the interest rate. The option can be combined with a period-certain guarantee so that if the beneficiary dies early, payments continue to a secondary payee for a minimum number of years.

Why the other options are wrong

• A) Payments for a fixed period only, with no survival requirement, describe the period-certain option, not life income.
• C) There is no age threshold for the life income option; payments begin according to the settlement plan.
• D) One lump sum describes the lump-sum option; the life income option instead spreads payments over the beneficiary's lifetime.

Memory hook

Life income pays until the last breath — guaranteed by the insurer.

Why A is correct

The life income option, a straight life settlement option, provides periodic payments that continue for the beneficiary's entire lifetime, guaranteeing income no matter how long the beneficiary lives. The risk that the beneficiary outlives the proceeds is transferred to the insurer, which uses mortality assumptions to fund the payments. This option is well suited to a beneficiary who needs dependable lifetime income rather than a lump sum. It is one of the recognized settlement options, along with lump sum, fixed amount, fixed period, and interest only. Payments under the life income option are largely a return of principal and are partially income tax free.

Why the other options are wrong

• A single lump-sum payment is the default settlement method under which the full proceeds are paid at once; it is not the life income option.
• Paying only interest while retaining the principal describes the interest-only option, under which the principal is preserved and later paid out.
• Payments for a fixed number of years describe the fixed-period option, which guarantees income only for a set time and not for life.

Memory hook

Life income = income for a lifetime, however long it turns out to be. The insurer carries the longevity risk.

Why A is correct

The life income option converts the death proceeds into a stream of payments that continue as long as the beneficiary lives, guaranteeing that the beneficiary cannot outlive the income. The amount is determined by the proceeds, the interest assumption, and the beneficiary's life expectancy. It addresses the risk of the beneficiary exhausting the proceeds too early. Fixed amount and fixed period options instead end when a set dollar total or time span is reached, regardless of how long the beneficiary lives, and a lump sum pays everything at once.

Why the other options are wrong

• B) The fixed amount option pays a set dollar amount each period until the funds are exhausted, with no guarantee that payments will continue for the beneficiary's lifetime.
• C) The lump-sum option pays the entire proceeds in one payment immediately after death, leaving no income stream for the beneficiary to live on.
• D) The fixed period option pays over a stated number of years and stops when that period ends, even if the beneficiary is still alive. Life income continues as long as the beneficiary lives.

Memory hook

Life income: the check keeps coming while the beneficiary keeps breathing.

Why A is correct

The life income option, sometimes called straight life income, pays the beneficiary a guaranteed income for life; the amount is based on the proceeds, the beneficiary's age, and mortality assumptions. Because payments are guaranteed for life, a beneficiary who lives longer than expected is protected from outliving the money. However, there is generally no remaining amount payable to heirs after death under the straight form. The other options, fixed period, fixed amount, and interest only, do not provide lifetime guarantees, which is what makes the life income option uniquely suited to those who need lifelong income security.

Why the other options are wrong

• B) The fixed period option pays out over a set number of years regardless of life expectancy, so payments end even if the beneficiary is still living. It does not guarantee lifetime income.
• C) The interest only option pays periodic interest while the principal remains intact for later distribution. It provides income without consuming the proceeds and ends when the principal is later paid out.
• D) The fixed amount option pays a specific sum at intervals until the proceeds are exhausted, which may end before the beneficiary dies. Only the life income option is tied to the beneficiary's lifetime.

Memory hook

Life income = a paycheck that lasts as long as you do—no refund, no leftovers.

Why A is correct

The life income option pays the beneficiary a guaranteed income stream for life, eliminating the risk of outliving the proceeds. The payment amount is based on the principal, the interest earned, and the beneficiary's life expectancy; the insurer pools the longevity risk so that payments continue even after the principal is exhausted. This option provides retirement-style financial security but forfeits the lump sum, and payments stop at death unless a period certain or refund feature is added. This longevity protection is especially valuable to a widow or widower who has no other guaranteed income and wants the proceeds converted into a dependable monthly retirement check.

Why the other options are wrong

• B) Preserving principal for heirs is the goal of the interest only option or leaving proceeds unspent; the life income option pays the principal out over time. The principal is distributed over the beneficiary's lifetime under a life income option rather than being held intact.
• C) Naming contingent beneficiaries is a function of the policy's beneficiary designation and does not apply to the life income payout itself. Contingent beneficiaries relate to the policy contract, not to the payout option after the insured's death.
• D) Automatic inflation increases are a COLA feature that must be added separately; a standard life income option does not provide them. No inflation indexing exists in the basic life income option unless a COLA feature is purchased separately.

Memory hook

Life income = a pension-like check that cannot be outlived.

Why A is correct

The life-income option converts the death proceeds into periodic payments that continue for as long as the beneficiary lives, functioning like an annuity. The payment amount is determined by the amount of proceeds, the payee's age and life expectancy, and the particular life-income variant chosen - straight life, life with period certain, or refund life income. Because payments can outlast the principal, this option provides income security against outliving the proceeds. Payments are taxed under the annuity exclusion ratio, with the interest portion taxable as ordinary income.

Why the other options are wrong

• B) A set number of years describes the fixed-period installment option, which does not depend on the payee's lifetime.
• C) Interest-only payments leave the principal intact. Life income consumes the principal over time through the periodic payments.
• D) A single payment describes the lump-sum option, which is a different settlement method from life income.

Memory hook

Life income equals a personal pension built from the death benefit.