What Are the Different Types of Term Insurance Payout Options?
Types of Term Insurance Payout
Term life insurance is a basic life insurance policy which provides insurance cover for a fixed time period. It provides a lump-sum payout to the designated nominee after the death of the insured.
The growth in the economy over the years has also brought about growth in the insurance sector. Over the time, the sector has evolved in terms of premiums and payout. These changes in the insurance sector have helped make the system and process more transparent. One benefit due to change in policies is that a beneficiary has multiple options on how to receive the sum assured in term insurance policy. Before we understand the different types of payout options in term insurance, let us know what payout is and when it comes into the picture.
What is Term Insurance Payout?
A term insurance payout is the total sum assured or coverage offered by the term plan. When you purchase a regular term insurance plan, the insurance company promises to provide a specified financial sum to your nominee in case of your death during the policy tenure. Usually, a standard term plan does not offer any return of premium or maturity benefit if you survive the policy term. Term insurance with return of premium variant provides a survival benefit as the refund of all the premium amounts paid over the policy term at maturity of the policy.
Over the years, insurance companies used to offer a lump sum amount to the policyholder’s nominee in case of a death claim. After due investigation (if required) and correctly processed claim form, the nominee would receive the sum assured. However, today most insurance companies offer different options on how your nominee would receive the sum assured in case of your untimely death? These options can be checked at the time of the purchase of insurance policy and you can choose the option which you feel is the best for your family and dependents..
Let us look at the different payout options for the term insurance plan -
1. Lump sum payout:
This is the most basic and traditional form of a payout. For example, you purchase a term plan with INR 1 Cr coverage and name your spouse as the nominee. You opt for a lump sum payout at the time of purchase. In case of your unfortunate demise during the policy tenure, your spouse needs to file a death claim with the insurance provider and supply necessary documents. The insurance company will process the claim form, check for any discrepancies, and settle the claim. Your spouse will receive the sum assured, i.e., INR 1 Cr, in their account as a result of the claim settlement.
As mentioned earlier, this is the most straightforward and traditional payout option that secures your family in your absence. Under Section 10 (10D) of the IT Act, 1960, the sum assured plus any policy proceeds or bonuses are completely tax-free for the beneficiary, subject to certain conditions.
2. Staggered Payout:
The staggered payout option is a new option available for paying out the sum assured to the nominee. . There have been several cases wherein the nominee (generally family members) do not have sufficient knowledge and resources to handle finances after the policyholder's death. They are unable to utilize the sum assured to maximum benefit and may invest unwisely.
In order to overcome this problem, insurance companies offer the option of periodic payments. This option offers a specified portion or percentage of the total sum assured at regular intervals (for example monthly payments) instead of a large one-time payment. Typically, the staggered payout period lasts 10-15 years, depending on the coverage amount and policy terms.
There are three different options under the staggered payment plan umbrella – a lump sum with fixed monthly payout, lump-sum amount with increasing monthly payout, and fixed monthly payout option.
Let us look at these options individually -
a. Lump sum with a fixed monthly payout: Under this payout option, the nominee receives a percentage of the sum assured immediately after the claim settlement. The remaining amount is divided into fixed monthly installments. This option offers the double benefit of covering the initial financial setback in the breadwinner's absence and provides regular monthly income to meet the day-to-day expenses.
b. Lump sum with an increasing monthly payout: Under this option, the beneficiary receives a fixed percentage of the sum assured immediately and increasing monthly payments over the policy term. . The option is designed to consider the impact of inflation on the policyholder’s family. Hence, the monthly payments increase, typically 10-20% per annum, depending upon the market conditions. The family can use the lump sum amount to clear out immediate financial liabilities like loans or other debts and then rely on these increasing payouts to meet their everyday financial needs.
c. Fixed monthly payout: Under this option, the sum assured is divided into equal monthly installments and paid over a set time frame. The payouts act as a monthly income for the policyholder’s family.
Brief Claim Process
In order to file a death claim with the insurance company, you must follow a preset process. There are three stages in the process – claim intimation, claim assessment, and claim settlement.
In claim intimation, the nominee needs to inform the insurance provider of the demise of the policy holder. The nominee needs to submit the policyholder's death certificate and other necessary documents within a specified time frame to the insurance company.Most insurance companies have a 90 day period to file the claim.
In the claim assessment stage, the insurance company scrutinizes the claim form and the documents. If any discrepancies are found, there is an investigation. .
After the due diligence process and successful assessment, the insurance company settles the claim and pays the sum assured as per the agreed policy terms.
The term insurance is an urgent need of the hour for your family's financial security in case of your untimely death. . One can opt for a suitable payout plan based on their family’s financial requirements. . Life insurance is an important personal finance investment so before making a decision one should consult a professional expert / financial advisor.