What is INCORRECT regarding the interest-only settlement option in a life insurance policy?

The option identifying that "interest on proceeds must be paid by the beneficiary" is correct in stating that this is an incorrect assertion about the interest-only settlement option. In this settlement arrangement, the insurer holds the principal amount of the death benefit and pays the beneficiary only the interest generated by that principal. This means the beneficiary does not have to pay interest; they simply receive it as income.

In the context of the other options, the beneficiary does receive interest-only payments (which is a key feature of this settlement option). The principal is retained by the insurer and typically remains with the insurer until a specified event occurs or the beneficiary decides to withdraw it in full, thus protecting it from being immediately claimed by the beneficiary or their creditors. Additionally, it is standard that the principal payments do not go directly to the estate unless there are no designated beneficiaries, preventing the funds from being unnecessarily taxed or becoming part of probate proceedings.