Monthly vs. Lump-Sum Payout in Term Insurance

 

Almost everybody spends the best decades of their lives working hard to provide their family stability and security. To this end, people save and invest their hard-earned money to fulfil goals to purchase a house, move abroad, or secure their child’s education and future. Term plans enable people to safeguard their family’s financial future, regardless of what happens to them. While purchasing a policy, you have to decide how you want your beneficiary to receive the settlement. You can opt for a single payout right after the claim or small monthly payments. Let’s evaluate these options and see which is better for you.

How Does the Monthly Payout Option Work?

The monthly payout option for term plans provides your beneficiary with an amount each month. There are three ways they may receive the total sum assured:

1. Portion of the Lump Sum and Monthly Instalments

   Under this option, the beneficiary could receive between 50% to 75% of the sum assured as a lump-sum payout immediately. The insurance company then pays a monthly amount for a specific number of years until the nominee receives the entire amount.

2. Assured Benefits and Monthly Payments

   Some plans split the sum assured in two. Half becomes the death benefit, which the beneficiary receives as a lump-sum payout. They receive the rest of the amount in equal monthly instalments. Ideally, this option provides the best of monthly payments and a large amount upfront.

3. Increasing Monthly Payments

   Here, the beneficiary does not receive any lump sum. Instead, they get monthly payouts that increase over time. You can ask the insurance company to increase the annual payout by 10% or 20% each year. Assume your child is your beneficiary. The lower monthly amounts can help with school fees or regular classes. After a few years, when your child reaches college, they may require additional finances to help with their living arrangements if they leave the city or country. The increasing monthly payouts help them deal with new expenses.

How Does the Lump-sum Payout Option Work?

As the name suggests, under this option the beneficiary receives the entire amount together. Before opting for this payout method, policyholders must consider their family’s financial literacy. If your beneficiary does not know enough about how to manage money, a large amount could overwhelm them. They might make incorrect financial decisions and not spend the amount as you intended. Conversely, if your beneficiary is financially savvy, they can invest the payout to build a larger corpus for the future.

What’s the Correct Option?

There’s no correct answer to this question. When you purchase a policy, you should pick a payout option based on your family’s financial needs.

• Monthly Payout

  A monthly payout enables your family members to deal with short-term financial decisions. Paying off EMIs, monthly utility bills or your child’s school fees all become easier to manage when dealing with smaller amounts provided each month.

• Lump-sum Payout

  A lump-sum payout allows your beneficiary to make big financial decisions. If you have significant financial liabilities or want to help your loved ones make a large purchase, this option might be better. Before picking a lump-sum payout, you must carefully consider whether your beneficiary has the acumen and ability to handle large amounts of money. If not, you might want to reconsider the monthly payout instead.

Purchasing a term plan requires some careful consideration. Apart from selecting the ideal payout option, you must also choose the right sum assured. As a general rule of thumb, your sum assured must be at least ten times your annual income plus extra if you have debts and liabilities. Before purchasing a policy, compare your options and check details such as the insurance company’s reputation and claim settlement ratio. The information will help you choose the best possible term plan for your family.

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ARN – ED/12/22/30861