By Santosh Agarwal
Buying life insurance is just one step towards securing your family’s future, the next important step is to choose the correct pay-out option for the term plan. Therefore, while opting to buy a life insurance, understanding how a life insurance policy pay-out works is critical, to make sure that you have enough coverage to meet your loved one’s financial needs. You can make the selection as per your requirement, and your family members’ financial management skills.
Life insurance offers you different pay-out options. You may opt for lump sum pay-out wherein the death benefit against your policy is paid at one go. However, there can be cases where most families have limited financial knowledge when it comes to finance handling and may fail to optimally utilize the amount received in the form of a single payment.
Hence, despite buying a policy that you think will protect your family, there could still be a case where the basic purpose of the insurance is not met. To overcome this concern, insurers have come up with monthly or periodic pay-out option where customers can choose to customize the plan as per their specific needs and requirements.
First let’s try to understand how the lump sum pay-out and staggered pay-out work.
Lump Sum Pay-out
The lump sum pay-out option is believed to be the simplest and cheapest form of life insurance. Under this plan, the insurance provider pays the nominee the entire death benefit as a single amount.
For instance, say Mr Sharma, aged 40 has a Term plan with Rs 1 crore sum assured and coverage up to 65 years. Now, in case he dies during the policy term, the insurer pays the sum assured – that is Rs 1 cr – to his family as a lump sum pay-out.
The table below compares four leading insurance companies providing term insurance. The premiums for traditional term insurance plans are quite low compared to returns-oriented plans. For a 30-year-old male, non-smoker the premium could be as low as Rs 7,497 per year, for an assured sum of Rs 1 crore paid as lump sum.
|LUMP SUM PAY-OUT OPTION|
|Insurer||Plan Name||Total Pay-out||Annual Premium (Rs)|
|ICICI Prudential Life Insurance||iPru iProtect Smart||1 Cr||9,739|
|HDFC Life Insurance||3D Plus Life Option||1 Cr||10,135|
|MAX LIFE Insurance||Online Term Plus||1 Cr||8,608|
|AEGON Life Insurance||iTerm||1 Cr||7,497|
This pay-out option, with several variants, came into existence over the last couple of years. Here, the death benefit is paid in parts over the course of many years. It is done to provide an income replacement to the policyholder’s family after the death of the sole breadwinner.
Staggered pay out basically gives you four options: the first is ‘Lump Sum with monthly income’ where the beneficiary of the policyholder receives some part of your sum assured as lump sum that is mutually decided by the insurer and the policyholder and rest as monthly pay-outs.
The second is ‘Lump Sum with increasing monthly income’where some part of your sum assured is given as a lump sum, and the rest is paid in monthly instalments which increase by 10-20 percent every year.
The third one is ‘Total sum assured in monthly income’ where your entire sum assured gets equally divided into monthly pay-outs for a pre-fixed time period.
The last one is ‘Total sum assured in increasing monthly income’ where the monthly pay-out gradually increases for a certain number of years. Under the third plan, the pay-out acts an income replacement for the dependents and plays a major part in helping the family to beat inflation.
For instance, if you want your beneficiaries (your spouse & children) to receive payments for at least a decade then monthly pay-out is a good choice for you to ensure that the family left behind faces no financial burden and maintain their monthly expenses and lifestyle, even in your absence. However, if you have a loan like a home loan, then opting for a lump sum payment is a better choice.
|INSURER||PLAN||LUMP SUM PAID ON DEATH||STAGGERED PAYOUTS||Total Payout||ANNUAL PREMIUM (Rs)|
|ICICI PRUDENTIAL Life Insurance||ipru Protect Smart||50 Lac||Along with the Lump sum amount you get equal income pay outs – 41,667 monthly income for 10 years.||1 Cr||9,008|
|HDFC LIFE Insurance||Click 2 Protect 3D Plus||1 Cr||Along with the Lump sum amount you get equal income pay outs – 40,000 monthly income for 10 years.||1.48 Cr||12,503|
|MAX LIFE Insurance||Online Term Plan plus||1 Cr||Along with the Lump sum amount you get equal income pay outs – 40,000 monthly income for 10 years.||1.48 Cr||11,092|
The author is Chief Business Officer- Life Insurance, Policybazaar.com. The article has been published in collaboration with PolicyBazaar. Opinions expressed are those of the author.
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