Insurance Commission Traditional Life Practice Exam

The primary function of a life insurance policy's settlement option is to determine how the death benefit is paid out. When a policyholder passes away, the beneficiaries can choose from several different methods of receiving the payout. These options can include receiving a lump sum, annuity payments, or interest-only payments, among other alternatives. The choice of settlement option affects not only the timing but also the amount and structure of the payouts to the beneficiaries, allowing them flexibility based on their financial needs and circumstances at the time of the death benefit's disbursement.

In contrast, the other choices do not directly relate to the function of settlement options. Tax advantages for beneficiaries may result from the life insurance payout, but they are not a direct function of how the benefit is settled. Similarly, while premium adjustments may be necessary based on the insurer’s assessment over time, these adjustments are separate from how the death benefit is allocated upon the policyholder's passing. Lastly, riders offer additional coverage or benefits but are not related to how the death benefit is received; they enhance the policy itself rather than dictate the terms of the settlement.