Term Insurance Plan Payout

If the beneficiaries of the term policy are financialy literate, lump sum payout plans offer greater rewards.

When you buy a term insurance plan, it usually comes with the option of receiving the sum assured (death benefit) either as a lump sum or in the form of staggered payouts. The lump sum option is quite simple. If the policy holder passes away during the policy term and, say, the sum assured was `1 crore, his family would get the amount as a lump sum payout. The staggered payout option is still a new phenomenon. The plans have been launched only in the last couple of years. This option has several variants. One, where part of the sum assured is paid as a lump sum and the rest is in monthly payouts. Two, where the entire sum assured is divided into monthly payments. Three, where the monthly payouts gradually increase for a certain number of years (see table).

To make an informed choice on which plan or variant suits you the best, consider the following: To start with, evaluate the lump sum and the staggered payouts from an overall return perspective.Bear in mind, the money available today is worth more than the same amount in the future. A `1-crore payout today is worth a lot more than `1 crore or even `1.2 crore payout staggered over 10-15 years. This is because you can invest the lump sum amount received and earn returns over the years.

A good way to calculate overall benefit of a staggered payout is by ascertaining its internal rate of return (IRR). The staggered payout options aren't that attractive when you take into account their IRR. For most plans, the IRR is below 7% (see: The real worth of staggered payouts). The 4-7% returns are tax-free and may appear attractive compared to returns from fixed deposit (FD) rates, where you have to pay tax on interest income. But, FDs are not the only option when it comes to investing the lump sum payout. A combination of debt funds, systematic transfer and systematic withdrawal plans, post-office monthly income scheme, etc. can fetch a much higher return.

You also need to look at your total premium outgo. The premium is generally the highest for the staggered payout option with gradually increasing payouts. From a pure returns perspective, it is better to opt for the lump sum payout option. However, you also need to take into account your family's financial literacy: Would the members be comfortable investing the lump sum payout? "For people whose dependents or family members lack financial awareness, the regular income option is better suited. They don't have to worry about how and where to put any lump sum death benefit.

When it comes to life insurance, you must make decisions that are easy to understand and implement for your family. If you feel your family may find it difficult to use the insurance funds effectively, opt for an income plan. Security reasons also make staggered payouts a better choice. "A large amount in the bank can make the family without a bread-winner vulnerable to frauds or misuse or abuse of the funds.

Consumers can also chose a mix of the two options: You can opt for both. To settle liabilities, it is better to opt for the lump sum option. To ensure regular income, go for the staggered payout

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