What option allows policyholders to decide how life insurance proceeds are distributed?

The correct answer is the settlement option. This option allows policyholders or beneficiaries to choose how they would like to receive the life insurance proceeds after the death of the insured. The settlement option provides various methods of distributing the proceeds, such as a lump-sum payment, installment payments over a certain period, or an annuity option. By providing these choices, it gives policyholders and beneficiaries the flexibility to select the distribution method that best meets their financial needs or goals.

This contrasts with other options like beneficiary designation, which simply refers to naming the individual or entity that will receive the death benefit and does not provide flexibility in how the funds are distributed. The non-forfeiture option allows policyholders to retain some value from their policy if they decide to stop paying premiums, but it does not pertain to the distribution of benefits. The grace period provision is a timeframe that allows policyholders a certain period to pay overdue premiums without losing coverage, which again does not involve the distribution of policy proceeds.