LUMP SUM OR STAG­GERED?

Term in­sur­ance plans al­low many pay­out op­tions these days. Here’s a quick guide on how to choose be­tween them

India Today - - COVER STORY - By Priyadarshini Maji

Aterm in­sur­ance plan was once a very sim­ple fi­nan­cial prod­uct that, in ex­change for monthly or an­nual pre­mi­ums, of­fered a lump sum pay­ment to the ben­e­fi­ciary when the pol­i­cy­holder died. To­day, there are many vari­a­tions, some of­fer­ing stag­gered pay­outs and others al­low­ing you to cus­tomise the plan. For ex­am­ple, one of HDFC Life’s re­cent of­fer­ings al­lows you to choose a rate of in­crease of in­come as well as the pe­riod for which you want to re­ceive the in­come. But be­fore all that, how does one choose be­tween re­ceiv­ing stag­gered and lump sum pay­ments?

Lump sum pay­outs

Tra­di­tional term in­sur­ance plans are the sim­plest and cheap­est form of life in­sur­ance. Un­der these plans, the in­surer pays a lump sum— the sum as­sured—to the pol­i­cy­holder’s fam­ily on the death of the pol­i­cy­holder. If the pol­i­cy­holder sur­vives the term pe­riod, noth­ing is paid. The pre­mi­ums for tra­di­tional term in­sur­ance plans are quite low com­pared to re­turns-ori­ented plans. For a 30-year-old pol­i­cy­holder, the pre­mium could be as low as Rs 8,200 per year, for an as­sured sum of Rs 1 crore.

Stag­gered pay­outs

This cat­e­gory has sev­eral vari­a­tions. In one com­mon method, the sum as­sured is paid out in equal monthly or quar­terly pay­ments. An­other op­tion is to have the pay­ments in­crease over time. For ex­am­ple: for a 35-year-old male and a sum as­sured of Rs 2 crore to be paid over 10 years, the pay­out be­gins at Rs 87,200, along with a lump sum pay­ment of Rs 1 crore at the time of death and in­creases by 5 per cent ev­ery year. Usu­ally, a part of the sum as­sured is paid as a lump sum—around 50-60 per cent—while the rest is paid in monthly in­stal­ments.

Re­turn of pre­mium

These poli­cies are for those who want their pre­mi­ums re­turned if they sur­vive the full term of their in­sur­ance plans. While the to­tal pre­mium is re­turned, the catch is that the pre­mium pay­ments are much higher than in no-frills term poli­cies. For ex­am­ple, for a Rs 1 crore pol­icy with a re­turnof-pre­mium op­tion and a 30-year term, HDFC Life charges a 30-year-old male non-smoker a monthly pre­mium of Rs 27,477. For its tra­di­tional plan, the monthly pre­mium is Rs 9,471.

Fi­nan­cial plan­ners rec­om­mend a mix of lump sum and stag­gered plans so that the fam­ily’s near-term com­mit­ments are met, with stag­gered pay­outs to take care of on­go­ing re­quire­ments. In both cases, the ben­e­fits re­ceived from in­sur­ance are tax-free.

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