It's no secret that Covid-19 has made us realize the importance of having insurance. Earlier, what was considered a tax-saving tool is now a major part of our financial planning. Term life insurance is one of the pertinent financial instruments to opt for a safe and secured future for your loved ones. It provides a financial shield to your family in your absence and makes sure that they have the same type of lifestyle without compromising on anything. ((calculator))

Under a term life insurance plan, the policyholder needs to pay a specific amount called premium to the insurance company. This premium can be paid on a monthly or yearly basis as preferred by the policyholder for a specified number of years. In exchange, the insurer pays a death benefit to the policyholder's appointed nominee. This death benefit can be received in many ways. Over the last few years, insurers have come up with multiple payout options such as lump sum payout and staggered payout in order to provide multiple options to the customers.

Lump-sum payout

In this option, the policyholder pays an annual premium for a fixed period, usually, 30-50 years against a total sum assured. If the policyholder dies, the nominee/beneficiary gets a lump sum amount that is equal to the sum assured. For example, Mr. Rahul bought a Rs 1 crore term cover at an annual premium of Rs 10,000. The policy tenure was 35 years. In the case of his absence during the policy tenure, his family will get Rs 1 crore lump sum amount in one go.

Staggered payout

At times, the family isn’t financially literate to utilize the lump sum payout option. As a result, despite buying a policy for financial protection, the basic purpose of insurance is not met. Therefore, insurers introduced a staggered payout option wherein the nominee receives death benefit in intervals. Policyholders can choose these payout options depending on their family’s requirements:

Monthly payout

In this option, the nominee receives the total sum assured in monthly installments. Instead of getting the Rs 1 crore lump sum quoted in the example above, the nominee will get around Rs 50,000 per month for 15 years.

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Annual payout

In this option, the nominee receives the total sum assured in annual installments. Instead of getting Rs 1 crore lump sum quoted earlier, the nominee will get around Rs 6 lacs per month for 15 years.

Lump-sum with monthly income

Under this plan, the beneficiary/ nominee receives around 50% to 70% of the total sum assured just after the death of the insured, and the rest of the amount is paid through monthly installments to support the family’s financial requirements.

Lump-sum with increasing monthly

In this option, the beneficiary receives a portion of the total sum assured as a lump sum and the remaining sum assured as monthly installments with an annual increase of 10-20%. This payout option is the best to beat inflation.
Increasing monthly: In this option, the beneficiaries receive the total sum assured in increasing monthly installments. The installments increase at a rate of 10% to 20% annually. This option is the best in order to help the dependents fight inflation.

What should you do?

A term plan is a must-have to build a financial safety net for your loved ones in difficult circumstances and these payout options have their own advantages. You need to see your family’s financial understanding, financial liabilities and any future goals and then make the decision accordingly. If your family has a good financial understanding and they can manage the lump sum amount efficiently, then you can choose the lump sum payout option. With a staggered payout option, you are likely to make short-term money decisions which is a safe bet.
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