Term Insurance: Lump Sum Vs Staggered Payout Option – Which one should you choose?

A term plan is no doubt a must-have for any breadwinner of the family and both these payout options have their own set of benefits.

Term insurance has undoubtedly gained great popularity amongst the working class over the last few years. A major reason being – it provides maximum value for your money invested over a term of 20 to 50 years. Moreover, for anyone seeking the maximum insurance coverage at the lowest premiums, term insurance is the ultimate solution. No wonder, people looking for financial security for their loved ones usually prefer investing in term insurance.

Now, when you buy a term insurance plan, it comes with the option of receiving the total sum assured – also known as death benefit – either as a lump sum or in the form of staggered payout. The process of lump sum payment is quite simple. In case of the sudden death of the policyholder within the policy term, the dependents of the deceased get the entire sum assured as a lump sum payout. On the other hand, there is a staggered payout option which is a relatively new phenomenon.

Lump-Sum Payout

Traditional term insurance plans are believed to be the simplest and cheapest form of life insurance. Under these plans, the policyholder pays a yearly premium for a fixed time period, mostly 20 to 30 years, against a total sum assured. In case the policyholder dies, the insurer pays a lump sum amount, equal to the sum assured, to the beneficiary of the policyholder. However, if the policyholder survives the term period, nothing is paid to the family of the policyholder. The premiums for traditional term insurance plans are relatively low and there is no return of premium plan if the policyholder survives the term.

Staggered Payout

Due to the lack of required knowledge, families often fail to properly manage the lump sum amount received against the term insurance policy of the deceased family member. To help families properly manage the finances in the best possible manner, most insurers have introduced different payout options like monthly or periodic payout option. Under all these plans, the beneficiaries receive some portion or % of the total sum assured as a lump sum and the remaining amount is received by the beneficiary in the form of monthly instalments that run over a period of 15-20 years.

Different Staggered Payout Options

Monthly Income: Under this plan, the beneficiary receives the total sum assured in equally divided monthly instalments for a pre-fixed time period.

Increasing Monthly: Under this plan, the beneficiaries receive the total sum assured in increasing monthly instalments. The instalments increase at a rate of 10% to 20% in order to help the dependents fight inflation.

Lump-sum with Monthly Income: Under this plan, the beneficiary of the policyholder receives around 50% to 70% of the assured amount just after the death of insured and rest of the amount is paid through monthly instalments. This helps the family of the insured to meet the day to day financial needs.

Lump-sum with Increasing Monthly Income: Under this plan, apart from receiving some portion of the total sum assured as lump sum, the beneficiaries receive the remaining sum assured in monthly instalments with an annual increase of 10% – 20%. The plan helps the beneficiaries in dealing with yearly inflation.

Take Note

All you need to do is analyse your family’s needs and requirements, and choose the most appropriate option for you. It is suggested that where ever liabilities are required to be paid off, it is advisable to go with the lump sum payout. However, if you A term plan is no doubt a must-have for any breadwinner of the family and both these payout options have their own set of benefits.wish to get your regular income ensured, staggered payout plan fits the bill.

(By Santosh Agarwal, CBO-Life Insurance. Policybazaar.com)