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