Term policies are the cheapest way to financially protect one’s family. In case of passing away of an earning member, their dependents get a death benefit which helps take care of financial needs.
Insurers usually give an option as to how the insured would like the payment to be made to their family members in case of claims.
Let’s understand the different payout options available under the term plan.
1. One-time payout
In this case, a 100% lump sum payout equivalent to the sum assured is paid to the nominee on the death of the policyholder. For example, if one were to purchase a life cover worth Rs 1 crore and opt for a one-time payout, then the entire amount of Rs 1 crore is paid to the nominee upon the death of the policyholder.
2. Fixed monthly payout
Here, the beneficiary does not receive any lumpsum payout upon the death of the policyholder. Instead, they receive the sum assured in the form of equally divided monthly instalments for a pre-fixed period (say 10-15 years). For instance, a fixed monthly payout for a sum assured worth Rs 1 crore is Rs 83,333 per month over a period of 10 years.
Some insurers additionally give the option of rising monthly payout. For instance, it could be a monthly payout of Rs 50,000 in the first year, Rs 55,000 (110% of Rs 50,000) in the second year and so on.
3. Mixed payout
In a mixed payout, the beneficiary gets the option to receive a part of the payment as lump sum and the rest in a staggered way. Let’s assume, you opt for a 50:50 mixed payout where the sum assured is worth Rs 1 crore. In case of a claim, Rs 50 lakh will be paid to the beneficiary, while the rest will be paid as monthly payout (Rs 41,667) over a period of 10 years. Here too, you might have a choice to opt for a yearly increase of 10% in monthly payments.
The premium cost
For a 30-year old male seeking a Rs 1 crore term cover till the age of 60 years, a one-time payout option will entail an annual premium of Rs 13,392, as per online quote of a leading insurer. If you opt for fixed monthly payout, your premium reduces to Rs 11,383.
Similarly, if you opt for a mixed payout, the premium is relatively cheaper than a lump sum(see graph).
It is cheaper to opt for a monthly payout or mixed payout than lumpsum because the payment for the former is staggered and often you don’t earn any return on it.
For instance, opting for a 50% lumpsum and 50% monthly payout commands an annual premium of Rs 12,387. In case of a claim, Rs 50 lakh is paid in lump sum, while the remaining claim amount (Rs 50 lakh) is divided into 120 equal instalments (Rs 41,667) and paid over a period of 10 years.
Furthermore, a monthly payout that increases every year has the highest premium. This is because the payout liabilities are higher for the insurer and also assured to its policyholders.
Making the choice
If the beneficiary is financially skilled, the one-time payout works the best as they can invest the claim money wisely and generate wealth. Moreover, it helps repay big debt in one shot.
However, if the beneficiary is not financially skilled they might struggle with managing the lumpsum amount or be misguided. By choosing the monthly income option, one protects their family members from such an ordeal. Monthly payout will act as a replacement for your income and lessen the burden of your spouse/parents in managing household expenses.
And it is better to opt for a monthly payout that increases by every year instead of a fixed one. The former protects your family members from the whip of inflation and enables maintaining their lifestyle. It’s a good choice even though it might not yield much financially.
When to go for mixed payout?
Mixed payout works if you have repaid major loans like that of a home loan but have small debt and financial responsibilities to take care of. One can opt for a proportion of lumpsum amount based on the extent of loans outstanding and the targeted monthly payout. For instance, if you are comfortable with Rs 50,000 monthly payout, then go for 40% lumpsum or 50% lumpsum if Rs 40,000 is sufficient.
Ensure you buy the right amount of cover which is a function of the life stage you are in, your financial goals and liabilities in books.
If you are opting for monthly payout, make an estimate of likely monthly household expenses by including spends on groceries, utilities, school tuition fees and leisure, while also factoring for inflation. Then, start looking at various payout options.
Insurers usually differ in their offerings as regards the monthly payout and the tenure. Ensure the monthly payout is sufficient while the tenure is long enough.
If your family members are financially proficient, then one-time payout is the best for your term policy. If not, go for a monthly payout with an annual hike that will give the necessary assurance.