Staggered Payout in Term Insurance: A Smart Way to Protect Your Loved Ones?

Typically, insurance companies disburse the death benefit to the nominee as a one-time lump sum payment. Nevertheless, if you think that your chosen beneficiary is not skilled at handling finances and would benefit from receiving the death benefit gradually, you can opt for the staggered payout option.

This article elucidates the staggered payout option in term insurance and whether it is a smart way to protect your loved ones.

What Is Staggered Payout in Term Insurance?

A staggered payout option in term insurance allows you to receive the sum assured in multiple payments over time rather than as a one-time lump sum. These payouts can be made monthly, half-yearly, annually, or increased on a monthly basis and can vary between different term plans and insurance providers.

What Are the Different Staggered Payout Options in Term Insurance?

1. Monthly/Yearly Payout:

Under the monthly payout mode, there is no immediate lump sum payout. Instead, your chosen beneficiary will receive the death benefit in equal instalments over a specified number of months or years.

For instance, if the term plan's assured sum is Rs 1 Cr, with the payout distributed as monthly instalments over a ten-year period, your family would receive Rs 83,334 as monthly payments for the duration of ten years after the insured event occurs.

2. Increasing Monthly Payout:

In the increasing monthly payout mode, the beneficiary will receive the death benefit in monthly instalments, but the amount increases periodically to counter the effects of inflation.

For instance, if the initial year's instalment is set at Rs 70,000 per month, it may increase to Rs 75,000 or Rs 80,000 in the subsequent year, depending on the plan's terms.

3. Partial Lump Sum with Monthly Payout:

This payment option combines a lump sum with monthly or annual payments. So, the beneficiary gets a percentage of the total death benefit as a lump sum immediately upon the policyholder's demise, with the remainder being paid out in monthly or annual instalments, as per your selected plan. Typically, most term plans allocate 50% to 60% as a lump sum and distribute the remaining payout in equal instalments.

For instance, if your sum assured is Rs 1 Cr and the plan specifies a lump sum payout of 50% of the sum assured, with the remaining amount to be paid in monthly instalments over the subsequent ten years, your family would receive Rs 50 Lakhs as a lump sum upon your demise. Subsequently, from the following month, they would receive Rs 41,667 as a monthly income for the next 10 years.

4. Lump Sum with Increasing Monthly Payout:

Opting for this payout selection means that the insurance provider will disburse a portion of the sum assured, typically 50% to 60% of the sum assured, as a one-time lump sum, with the remaining balance distributed in monthly instalments, and these payments gradually grow over time.

It is important to choose the preferred death benefit payout mode when purchasing the term plan because changes to this option are usually not allowed after purchasing the policy.

Things to Consider When Choosing a Staggered Payout Option:

Choosing the lump sum payout option gives you more flexibility on how to use the funds. If the nominee takes the entire sum assured and invests it in traditional financial instruments like bank FDs or PPF, they might not receive inflation-beating returns. If they invest the funds in market-linked investment avenues like equity mutual funds, they can potentially generate higher returns.

However, many beneficiaries lack enough financial knowledge. When they receive a large sum of money, they may not utilise it optimally. Misguided investments and improper usage of money can lead to financial losses.

While the sum assured remains the same for lump sum payout and staggered payout options (unless you have opted for the increasing payout option), there could be a slight difference in the premiums, which needs to be considered before choosing the option.

Moreover, the amount received on a monthly basis from the insurance company will be non-taxable, unlike interest earned from investments. But that will make a difference only in the higher income tax slabs.

It is advisable to choose the lump sum payout option if you have many liabilities to be paid off and/or have sufficient sources of income.

On the other hand, if you want to be assured of a regular inflow of money, choosing the staggered payout option makes sense.

Which Staggered Payout Option Is Better?

A staggered payout option can be chosen as per your specific needs.

If you have confidence in the ability of your chosen beneficiary to manage the death benefit responsibly, you may opt for a lump sum payout option. Furthermore, if the death benefit is intended to settle your high-amount debts, a lump sum payout is typically the more suitable choice.

Conversely, if you believe the death benefit should serve as a replacement for your regular monthly income, a staggered payment option might be a more logical choice.

Ultimately, it is essential to assess your family's future expenses and make a well-informed decision regarding the most appropriate payout plan for your circumstances.

To conclude:

A term life insurance policy is a crucial addition to the financial portfolio for every breadwinner of the family and should never be overlooked. The various payout options come with their distinct benefits.

When considering a term plan, it is wise to carefully assess the requirements of your family and then select the most fitting term insurance policy.

The staggered payment option allows you to tailor the plan to align with your family's specific needs. By combining a lump sum payment with monthly instalments, you can have peace of mind knowing that your family will remain financially protected in your absence.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.