Term Insurance: What to choose, lump-sum or staggered payout option?

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Insurance as security is one of the important things, as it not only protects you from unknown life issues but also provides you with tension-free life. Term insurance has become one of the most preferred options for a middle class Indian who is the sole earner of the family. Term insurance can be an essential instrument considering the family’s future financial security in case of sudden death. For a small amount of money over a customizable period, term insurance plan holders can provide their family with cash ahead of their time.

It is, therefore, important to understand the benefits and returns while opting for term insurance. You have to make sure that the sum assured of the policy that you have taken meets the needs of your beneficiaries after you. Hence, term insurance plans come with a lump sum and staggered payout option. Let’s us find out in detail.

Lump-sum Payout:

If the policyholder passes away during the policy term and, say, the sum assured was Rs 1 crore, his family would get the amount as a lump sum payout. But, he will not get anything if he survives the term. The policyholder has to pay the yearly premium for 20-30 years against the total sum insured.

Staggered Payout option:

Many companies have started to roll out staggered payout systems where the family cannot access all the saved money in one go. The beneficiaries get different payout options like monthly or periodic payout option. The nominee will get some portion or percentage of the total sum assured as a 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.

Different Staggered Payout Options:

Monthly income: Under this 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 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 a 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.

”Staggering payout options suit the best when a beneficiary has no idea about reinvestment and want regular income inflow every month. Lump-sum with monthly income is for a dependent who has loans to be paid. But if the beneficiary is able to utilise the amount to get higher returns in future, then only lump sum is the advisable option,’’ suggests Arnav Pandya, Investment Expert & Certified Financial Planner.