Lump sum amount
The sum assured is given to the beneficiary as a one-time payment.
The sum assured is paid out in instalments. There are different types of staggered payouts -
The beneficiary receives the total sum assured in equal monthly instalments for a fixed time period as per the policy terms.
Lump sum with Monthly Income
The beneficiary receives a fixed amount at the time of claim and the rest is paid via equal monthly instalments.
Increasing Monthly Income
The policy amount is paid in increasing monthly instalments.
Lump sum with Increasing Monthly Income
The beneficiary receives a fixed lump sum amount and the remaining is paid in monthly instalments that increase year-on-year.
So should I go for a staggered income payout?
Here is a comparison of two term plans and their payout options for a term plan of ₹ 1 Crore for a 30 year old male with normal health conditions -
If you had taken the entire amount at the time of claim, you would have more flexibility on how to use the funds. If the nominee invests the funds in different investments avenues, he can potentially generate higher returns. The premium payable for the monthly payout option of HDFC is higher. With regards to plans from Kotak, the sum assured amount is the same but the premium is lower in case of the staggered payment option. But the amount given at the time of claim is just 10% of the total insurance cover. In a realistic scenario, it may not be enough for a family that has lost the earning member and are looking at paying off loans.
If you have many liabilities to be paid off, choose the lump sum payout option. Annuities may not be useful if nominees have sufficient sources of income. If the nominee dies before the benefit period is over, all benefits of the term plan are not passed on. If the lump sum option was chosen, it might have been transferred to heirs of the nominee. Many beneficiaries lack enough financial acumen. When they receive a large sum of money, they may not utilize it optimally. Misguided investments and improper usage of money can lead to financial losses. On the other hand, if you want to be assured of a regular inflow of money, choose the staggered payout option.