We acknowledge that term insurance is an integral part of our overall financial well-being. One of the main components of a term plan is the payout that our family would receive if we come face-to-face with the unforeseen. Today, term plans have evolved to factor in consumer needs and offer flexibility in terms of choosing this mode of pay-out. This customisation has made it more practical and buyer friendly. Let’s elucidate in simple terms what each of the option offers.
Lump sum/one-time payment:As the name suggests, here the beneficiary will get the full amount in one go after the death of the policyholder. Post this lumpsum payment, there will be no interaction between the policyholder’s family and the insurer.
Staggered payment: Under this, the family will get portion of payment on death and the balance is paid-out in the form of recurring monthly income over the period of 10-15 years, depending on the insurer and the plan you opt for. A pre-defined amount will be released every month quite similar to the policyholder’s salary. Typically, insurers offer two payment options within staggered plan – monthly income plan and increasing monthly income plan. The increasing monthly option takes inflation and lifestyle into consideration and hence, increases monthly income every year.
With choices comes the confusion! To decide which term plan is best suited, let’s take the case of Mr Sharma who had a term plan with regular lumpsum payment option. Post his sudden death, his wife Ms Sharma received a lumpsum amount of R50 lakh.
She being financially illiterate and at a psychologically unstable phase of her life relied on her relatives to decide the fate of money on her behalf. The money was invested in a bad property and some wrong mutual funds. It was a total financial disaster and it was too late before Ms Sharma realised that the money was gone and she was left with no financial assistance to support her teenage daughters. This has happened to a lot of families and in this case staggered payment would have been a better choice. This way, you wouldn’t have to manage or organise huge corpus on your own. Also, the premium for staggered term plan is comparatively lower than regular term plan as the insurance company don’t have to make the entire payment in one go.
You should choose this if you think your family or nominee is not financially mature to take the right investment decision and can be easily influenced by greedy relatives.
If you have financially educated your family and are confident that they can sensibly use the money or if they are at an important life stage like education or marriage, then opt for lumpsum payment. This money can be reinvested in funds to get better returns. However, there are risks and limitations too.
No one knows your family better than you so you are the best judge. Whatever the mode of payment you choose it is best to talk to the family and educate them on financial aspects.
The writer is CEO & co-founder, Policybazaar.com