Virginia State Life, Health and Annuities Practice Exam

In the situation described, if the beneficiary of a life insurance policy dies after receiving only six payments through the life income settlement option, the remaining balance of the life insurance proceeds is kept by the insurance company rather than being paid to anyone else. The life income settlement option is designed to provide the beneficiary with a series of payments for their lifetime.

However, one significant aspect of this option is that the insurance company guarantees those payments, yet if the beneficiary passes away before the total value of the principal amount has been paid out, the remaining funds are not distributed to heirs or the deceased's estate. Instead, any balance that remains is retained by the insurance company as part of the terms of the contract. This design serves to limit the company’s long-term liability while providing a defined benefit to the beneficiary while they are alive.

Therefore, retaining the remaining balance supports the operational model of the insurance company and aligns with the contractual nature of the life income option, wherein payments stop upon the beneficiary's death.