Final answer:
Option (2), If the beneficiary dies after payments, the balance of the principal normally becomes part of their estate and is distributed according to state intestacy laws or according to the terms of any will and the governing contract.
Step-by-step explanation:
When a beneficiary dies after payments have commenced, the balance of the principal is typically addressed by the terms of the contract or agreement that governs the financial arrangement. In the general case where no specific instructions have been set forth, and the beneficiary has not established a will or trust (dying intestate), the balance would usually be transferred to the beneficiary's estate.
The estate would then be distributed according to state intestacy laws, which often prioritize spouses, children, and other close relatives. The principal balance would not be forfeited, returned to the payer, nor would it automatically be donated to charity unless the contract stipulates such actions or the beneficiary had directed such a disposition of their assets in a valid will.