Term Insurance

How to Choose the Right Term Plan Payout Option for Your Family

Nov 16, 2021

We choose to invest in insurance policies to ensure financial security for ourselves and for our family because life is full of uncertainties. And since no one knows what the future might have in store, insurance is a way to ourselves financially secure. 

A term plan is a type of insurance which ensures financial security for the family and loved ones of the policyholder in case he passes away all of a sudden. Term plans are meant to provide for those who might be dependent on the policyholder when they will not be around them anymore. 

Now, while planning for the financial well-being of your near and dear ones, it is also important to make sure how the money will be put to use in your absence. This is because not everyone is well-versed in matters of handling finances and the amount might not be used wisely, thereby resulting in financial difficulties of various kinds. 

A typical term plan pays a lump sum amount in the event of the death of the policyholder during the term policy tenure. So, in order to address this concern, several insurance companies have come up with customized insurance products and different payout options. 

The customizations determine how the sum assured will be paid out to the nominees in case of the policyholder’s untimely demise. This in turn helps you to make an informed decision as per your family’s needs and knowledge on managing wealth.

So, let’s see the different types of term insurance payout options.

Different Types of Term Plan Payout Option

The several alternative payout options offered by insurance companies these days have made term plans more practical and consumer-friendly. 

The following section will offer you a glimpse into the different types of payout options that are offered by the companies:

One-Time Lump Sum Payout

  • This is by far the most widely-known payout option. As its name suggests, this plan ensures that the beneficiaries or the nominees will receive the full amount assured of the policy in case the policyholder passes away during the policy tenure. It is the simplest option and therefore doesn’t need much explanation. 

Example: Let’s say you have bought a INR 1 crore policy for a tenure of 40 years. Now in case you pass away within the policy tenure which is say, 20th year, your nominee(s) will be paid INR 1 crore in one go.

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum Received by the Nominee(s) (INR)

One time Lump Sum Payout

1 crore

40

1 crore (as lump sum in case the policyholder passes away within 40 years)

Fixed Monthly Payouts

  • In case of this payout option, the beneficiaries don’t receive any lump sum amount. Instead, the sum is paid to the nominees in the form of a fixed monthly income for a fixed period of time (say 10-15 years). 

For example: You have bought a term plan with 40 years of policy tenure, which assures a cover of INR 1 crore. If you die within the policy tenure, the cover will be paid to your nominee(s) in the form of a monthly income of INR 83,333 for the subsequent 10 years. 

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum Received by the Nominee(s) (INR)

Fixed Monthly Payout

1 crore

40

Monthly instalment of INR 83,333 for 10 years

Some insurers additionally provide an option of rising monthly payout. 

For example: If the monthly payout for a INR 1 crore policy with a tenure of 40 years is 0.4% of the policy sum assured, i.e. INR 50,000 in the first year. 

For the second year, with an increment of 10% p.a on the first year monthly income, it will be INR 55,000, and so on.

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum Received by the Nominee(s) (INR)

Monthly Payout (increases yearly)

1 crore

40

First year, 0.4% of the sum assured - INR 50,000. And for 2nd year, increase by 10% p.a. on previous year’s monthly income for 10 years [INR 50,000 for the first year, INR 55,000 for the second year, and so on]



 

Some insurance companies also offer a staggered payment option. 

Under this payout option, the beneficiaries receive a portion of the assured sum as a lump sum in the event of the death of the policyholder while the remaining amount is paid in the form of monthly instalments for over a period of time depending on the plan that is opted for. 

The variations have been discussed as follows:

One time Lump Sum + Fixed Monthly Payouts

  • If you choose to buy this plan, a portion of the sum assured will be paid to the beneficiaries in the event of the death of the policyholder while the remaining sum will be paid in the form of a fixed monthly income for a fixed period of time. 

For example: You have bought a term plan which assures a cover of say, INR 1 crore. Now, if you die within the policy tenure i.e. 10 years, a portion of the sum assured will be paid to your nominee(s). Let’s assume 30% of the money will be paid as a lump sum while the remaining 70% will be paid to them in the form of a fixed monthly income for a fixed period of time.

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum Received by the Nominee(s) (INR)

One time Lump Sum + Fixed Monthly Payouts

1 crore

10

  • A lump sum of INR 30 lakhs (30% of the policy cover when the policyholder passes away) 


 

  • The remaining INR 70 lakhs to be paid in the form of monthly instalments
  • One Time Lump Sum + Increasing Monthly Payouts: Just like the payout option discussed in the previous point, a lump sum will be paid to the nominee(s) when the policyholder dies. The remaining portion of the assured sum will be paid in monthly instalments which increase by a predetermined percentage.

 For example: You have invested in a INR 1 crore plan. If you die all of a sudden within the term as stated in the policy (say 10 years), one portion of the assured sum of money say, 40% of the cover i.e. INR 40 lakhs will be paid to your beneficiaries immediately. The remaining money will be paid in monthly instalments of say, INR 50,000 which increases by say, 10% every year.  So next year, the monthly payout will be INR 55,000 and so on. The total payout in this case is more than the original sum assured. 

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum Received by the Nominee(s) (INR)

One time lump sum + Increasing Monthly Payouts

1 crore

10

  1. A lump sum of INR 40 lakhs (40% of the policy cover when the policyholder passes away)
  2. The remaining INR 60 lakhs (60% of the policy cover) is paid in the form of monthly instalments which increase by 10% every year –
First Year – INR 50,000
Second Year – INR 55,000
Third Year – INR 60,500
Fourth Year – INR 66,550
Fifth Year – INR 73,205 and so on….

Apart from the payout options discussed above, there are many plans that even pay 100% of the sum assured upfront and in addition to it, pays a monthly income (fixed or increasing) to the nominee.

For example: You have bought INR 1 crore plan. In case you die within the policy tenure (10 years), the total sum assured i.e. INR 1 crore will be paid to the nominee(s) immediately. In addition, a monthly payout of INR 50,000 will be made for the next 10 years. So, the total payout in this case will be more than the original sum assured. To be precise, the nominee(s) will receive INR 1 crore + INR 60 lakhs (INR 50000 x 12 x 10).

Payout Option

Policy Cover (INR)

Policy Term (years)

Sum to be Received by the Nominee(s) (INR)

Total sum assured paid as a lump sum + Monthly Income (fixed or increasing)

1 crore

10

  • 1 crore as a lump sum
  • An additional INR 60 lakhs to be paid as monthly instalments for 10 years. (if the monthly instalment is say, INR 50,000. So, INR 50,000 x 12 x 10= INR 60 lakhs

The Premiums for Different Payout Option

While the lump-sum plus staggered payout options are attractive and tempting, they do not come without their cost. Each of the payout options have different premiums since the total sum that the family of the policy holder receives, varies with each option. The premiums are generally the highest for staggered payout options with increasing monthly payouts. Let us take a look at the different premiums for different payout options to get a better understanding of the most suitable option.

Consider a 30 year old male non-smoker, with a term cover of INR 1 Crore and a policy term of 30 years. 

Payout Option

Policy Cover (INR)

Policy Term (years)

Annual Premium (INR)

Sum Received by the Nominee(s) (INR)

Lump-Sum Paid on Death

Staggered Payouts

One time lump-sum

1 crore

30

10,523

1 Crore-

Fixed Monthly Payout

1 Crore

30

7,306

-1.2 Lakh every month for 100 Months

One Time Lump-sum + Monthly Payouts

1 Crore

30

8,717

10 Lakh50,000 per month for 15 years

14,010

1 Crore50,000 per month for 10 years

How to Choose the Right Payout Option

As we have mentioned in the beginning, not everyone can manage finances well. A limited knowledge in finances may lead to unwise expenditures. So, before choosing a payout option, a buyer should be wise enough to judge if their family is capable of handling finances in a mature way when they won’t be present any longer. The following table will illustrate which payout option would be suitable for whom and why it would be suitable for them:

Sl. No.

Payout Option

Who would it be suitable for?

Why would it be suitable for them?

1.One time Lump Sum Payout
  • Nominees/ beneficiaries who can manage finances well and are capable of utilizing the assured amount in a mature way, when the policyholder is no longer around
  • If the nominees are mature enough, they are likely to reinvest the money in funds to obtain better returns.
  • They can repay big debts with the money.
  • They are also likely to spend the money for education, marriage or other important purposes.
2.Fixed Monthly Payouts
  • Nominees/beneficiaries who are not mature enough to take care of expenses









 

  • Nominees/ beneficiaries who are incapable of repaying debts in the absence of the policyholder









 

  • Nominees/ beneficiaries who can be easily deceived or misguided or can be easily persuaded to invest in the share market or chit funds
  • The fixed monthly payout will act as a replacement of the income of the deceased policyholder.
  • It will lessen the burden of the nominee(s) in terms of management of household expenses.
3.One time Lump Sum + Fixed Monthly Payouts
  • The lump sum amount can be used to clear off debts and loans and the monthly payouts will be a replacement of the income of the policyholder and can be used for household and other expenses.
  • In case the policyholder opts for the plan which offers a monthly payout which increases on a yearly basis, it will be a smart choice. This is because it will protect the nominee(s) from inflation.
4.One time Lump Sum + Increasing Monthly Payouts

Key Takeaways

Before investing in a term plan a potential policyholder must consider all the financial requirements of their loved ones which can be taken care of in future when they might not be around anymore. Besides, they must determine if his family members are mature enough to deal with their expenses in his absence and accordingly invest in a term plan with proper payout options so that in their absence the needs of his family are met without them having to face any problem.

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