When you purchase a term plan, you have the option of selecting the payout option, either in a lump sum or in staggered payouts. Let’s check out which option is more beneficial for a term insurance payout.
The primary reason that the term plan provides the maximum coverage for the amount invested, it becomes the most popular insurance coverage amongst the working class. Moreover, it becomes an ultimate solution because of its low premium towards the assured sum.
The process of payment is simple in case of a lump sum. On the death of the policyholder, the assured sum is given to the nominee. In case of the staggered payout, the amount is given to the nominee in a monthly or periodic payout.
Choosing the option of payment – lump sum or staggered option
The option of choosing lump sum payout over staggered payout is still a question. Staggered payout is a new phenomenon, and it lessens the misuse of funds in the absence of the primary breadwinner. However, some still believe that the lump sum payout option is even better if the financial planning is done correctly.
Benefits of choosing lump sum
One of the ways to calculate the benefit of staggering payout over lump sum payment is by calculating the IRR.
If IRR is considered, staggered payout option isn’t as attractive as Lump Sum.
To evaluate it is necessary to know that the amount that is worth today will not be the same tomorrow. Suppose a lump sum of 1 Crore that is worth today would not have the same worth if paid in a staggering payout of 15 – 20 years.
The lump-sum amount can be invested in different investment options and allow to multiply over the years.
The IRR for staggered payout is below 7% for most of the plans.
Staggered payout is a new phenomenon with different payout options
Most of the times, it is seen that the lack of proper financial knowledge leads to misuse of the lump sum.
To allow the families to use the funds in the best possible manner, lenders have planned to give the lump sum in periodic options. One can also choose a part of the amount in lump-sum payment and the other part in periodic payouts. The different payout options that can be chosen are mentioned below.
Lump-sum with monthly income:
Under this payout option, 50% – 70% of the matured amount is given in lump sum to the family of the deceased, while the rest of the sum is paid in monthly instalments.
Lump-sum with increasing monthly income:
Here a part of the sum is paid in a lump sum while the rest of the amount is paid in increasing monthly instalments with an annual increase of 10% to 20%. This way, beneficiaries can deal with inflation.
Increasing Monthly:
There is no lump-sum payment under this, and the beneficiaries receive the amount in instalments with an annual increase of 10% to 20%.
Monthly Income:
Under this, the maturity amount is divided into equal monthly instalments for a fixed period of time.
So, choosing the correct payout option is essential. One should be aware that giving a lump sum payment can also lead to misuse of the funds and the beneficiaries may end up losing everything because of improper planning.