When you buy a term insurance plan, it comes with the option of receiving the total sum assured either as a lump sum or in the form of staggered payouts. Which one should you choose?
Term insurance has undoubtedly gained huge popularity amongst the working class over the last few years. A major reason is — it provides maximum value for your money invested over a term of 20 to 50 years. Moreover, for anyone seeking the maximum insurance coverage at the lowest premiums, term insurance is the ultimate solution. No wonder, people looking for financial security for their loved ones usually prefer investing in a term insurance plan.
Now, when you buy a term insurance plan, it comes with the option of receiving the total sum assured – also known as death benefit – either as a lump sum or in the form of staggered payouts. The process of lump sum payment is quite simple. In case of sudden death of the policyholder within the policy term, the dependents of the deceased get the entire sum assured as a lump sum payout. On the other hand, there is staggered payout option which is a relatively new phenomenon. Though, both these payout options have their own pros and cons, still industry insiders believe that part staggered payout option is relatively better than the full lump sum payment option.
Different Staggered Payout Options
Due to lack of required knowledge, families often fail to properly manage the lump sum amount received against the term insurance policy of the deceased family member. To help families properly manage the finances in the best-possible manner, most insurers have introduced different payout options like monthly or periodic payout option. Under all these plans, the beneficiaries receive some portion or % of the total sum assured as lump sum and the remaining amount is received by the beneficiary in the form of monthly instalments that run over a period of 15-20 years.
Here is a brief description of each of these plans:
# Monthly Income: Under this term plan, the beneficiary receives the total sum assured in equally divided monthly instalments for a pre-fixed time period.
# Increasing Monthly: Under this plan, the beneficiaries receive the total sum assured in increasing monthly instalments. The instalments increase at a rate of 10% to 20% in order to help the dependents fight inflation.
# Lump sum with Monthly Income: Under this plan, the beneficiary of the policyholder receives around 50% to 70% of the assured amount just after the death of insured and the rest of the amount is paid through monthly instalments. This helps the family of the insured to meet the day to day financial needs.
# Lump sum with Increasing Monthly Income: Under this plan, apart from receiving some portion of the total sum assured as lump sum, the beneficiaries receive the remaining sum assured in monthly instalments with an annual increase of 10% – 20%. The plan helps the beneficiaries in dealing with yearly inflation.
Is the premium right for you?
Finally, take into consideration the depth of your pocket. It does not make sense to choose a very high premium plan and then not be able to pay for it. It is best to go for a term plan that is both feature-loaded and is also light on the pocket. One can buy a term plan at the lowest premium by selecting from one of the online options.
Choosing the right plan has the highest possible significance in financial planning.
If you are worried about the poor financial management skills of your loved ones, then choose an appropriate death benefit payout option. By doing so, you will protect your family members in your absence against fraudulent agents or investment schemes and greedy relatives.
Through this option, you can also protect them from overspending and other temptations that come with having huge amounts of money. Choosing the right death payout option will protect the death benefit amount from being eroded before it fulfils its defined purpose.
The following is a comparative table of 5 leading insurance companies providing term insurance of Rs 1 crore sum assured for a non-smoker, 30-year-old man who earns between Rs 5 and Rs 7 lakh annually. The duration of term is 30 years and the payout method is lump sum + monthly income.
A term plan is no doubt a must-have for any breadwinner of the family and both these payout options have their own set of benefits. All you need to do is analyse your family’s needs and requirements, and choose the most appropriate option for you. It is suggested that where ever liabilities are required to be paid off, it is advisable to go with the lump sum payout. However, if you wish to get your regular income ensured, staggered payout plan fits the bill.
(By Santosh Agarwal, Associate Director and Cluster Head-Life Insurance, Policybazaar.com)