Which Term Plan Payout Option is Better: Lumpsum or Monthly

Term insurance plan is by far the simplest method, whereby one can ensure financial security for their family or those dependent on their income in case they pass away all of a sudden. To begin with, term insurance policies are purely death benefit plans and offer no maturity benefits to the beneficiaries of the policyholder. Now, these term plans offer multiple payout options. The payout options can be broadly divided into two categories- Lump Sum payout option and Monthly payout option.

Lump Sum Payout Option

If a customer opts for a lump-sum payout option, the insurer is liable to pay a lump-sum amount which is equal to the cover or sum assured of the plan, to the beneficiaries of the client in the event of their death. This is the most popular payout option which the customers avail. The policy is terminated after the payment of the requisite amount.

For Example: Let’s say you opt for a term policy with a cover of INR 1 crore. Now if due to some unforeseen circumstances, you pass away during the policy term which is say, 30 years, all your beneficiaries will be entitled to receive INR 1 crore from the insurance company.

The amount received by the beneficiaries as a result of the demise of the policyholder can be put to a number of uses. 

• The money can be used to settle loans or debts or any other financial liability.
• If the beneficiaries want to put this money to the best use, they are likely to invest a part of the money in certain kinds of funds which will yield high returns.
• The money can be utilized for several purposes such as education, marriage, donations to charity and so on.

But if the nominee(s) are not yet capable of efficiently handling finances, they are likely to spend it in an unwise manner. Besides, they might be easily manipulated to invest the money in the share market or in chit funds. Even dishonest people may usurp their money by adopting unfair means. This would lead to a failure of the primary objective of the insurance scheme, that of ensuring security to the beneficiaries of the deceased policyholder. Therefore, one must choose this payout option only if their nominees are capable of handling financial matters.

Monthly Payout Option

If the nominee(s) of a policyholder is not yet capable of dealing with financial matters, they must opt for the monthly payout option. Many insurance companies offer staggered or monthly payout options these days. Instead of a lump sum amount of money, the nominee(s) will receive a portion of the sum assured in the form of monthly instalments.

For Example: Suranjana has bought a term plan with a cover of INR 1 crore and in the event of their death within the policy tenure the nominee(s) will receive a monthly instalment of INR 83,333 for a period of 10 years.

Sometimes, however, the policyholder may also opt for plans which provide lump-sum payout+monthly income when the policyholder passes away. A percentage of the assured sum is paid as the lump sum amount. The remaining portion of the sum is paid in the form of monthly instalments, which serve as a replacement of the deceased policyholder’s income. 

The monthly instalments may remain fixed until the end of the policy tenure or may increase by a pre-determined percentage on a yearly basis until the end of the term. The lump-sum amount can be used to clear off debts and the monthly instalments may be utilized for several expenses or other liabilities in the absence of the breadwinner. In addition, this payment option ensures security against inflation.

Let’s take an example.

Anwesha buys a term policy of INR 1 Crore which will pay a part of the sum assured on the event of her death. The remaining amount will be paid in the form of monthly instalments over a stipulated number of years.

Key Takeaways: Which Payout Option is Better?

The policyholder should opt for a payout plan pretty wisely. If he/she feels his/her loved ones to be incapable of handling the finances in his/her absence, he/she must always opt for a monthly payout option and the variations offered under the same based on the financial requirements of his/her near and dear ones. Otherwise, he/she may choose the lump sum payout option because it is the simplest alternative available.