What is a Term Insurance Plan?
Most middle-class breadwinners in Indian society find it essential to have a term insurance plan, to secure their family's future in case of their untimely death. For a small amount of money over a customizable period, term insurance plan holders can provide their family with cash ahead of their time, provided they have enough income to spare large amounts of money regularly.
But towards the end of the day, only we know our family best – many policyholders worry about how their family may spend the money they leave behind, especially if they would use it all quickly and end up with less security than they began. This potential misappropriation of the death benefit is a cause of concern for many policyholders. Many companies have started to roll out staggered payout systems where the family cannot access all the saved money in one go.
Lump-Sum Payout: Dangerous Spending
Many banks offer life insurance payouts as lump sums – if the assured sum is Rs. 1 Crore, the family will be given that large sum of money in one go. In cases where the term insurance plan offered a lump-sum amount of money immediately after the policy holder's untimely demise, the family may splurge on the funeral or o0n other exorbitant goods and services, leading to financial instability.
If the concerned nominee for the lump sum money is not good at finances or waste all of it in a short period, the whole idea of saving up for the future of your descendants is rendered useless. This is why companies are beginning to offer varied payout options for clients looking for a term insurance plan.
Staggered Monthly Pay Out
The option to go for staggered payouts allows term insurance plan holders to choose how much money their nominated family member would get and at what point. In some instances, they will be allowed a certain percentage of the full amount initially, followed by small amounts of money paid as monthly installments paid to them over the next two decades or so.
Various Combinations of Staggered Payouts
Most companies that offer a term insurance plan provide staggered payouts in multiple combinations that you can choose from:
1. The nominee is a high proportion of the sum assured as an immediate death benefit, followed by a monthly income paid from the remaining sum. The initial sum can be anywhere from half the guaranteed amount to 75% of it. The remaining will be paid according to how much is left and will be small financial assistance to the family (unless they store the immediate death benefit sum in a thrifty manner)
2. The assured death benefit lump sum is half the overall amount, and the rest is paid in monthly installments. This strikes a perfect balance between lump-sum and staggered payouts and is arguably the best option for those who are unsure of their family's financial planning skills. The initial payout can handle immediate spendings, such as the funeral or impending weddings in the case of an untimely death. Simultaneously, the rest can be delivered to the nominee as a monthly income for their upkeep.
3. Lastly, there are total staggered payouts, where the monthly income increased by 10%-20% every year. This is beneficial for many reasons – if your nominee is a child who will eventually grow to be a college student, there will be a need for an increase in monthly allowance. Increments in monthly installments also take into account possible inflation – the money we pay today, in 2020, may not be enough to cover the needs of someone in the future, which is why increments are highly recommended for those going for a long term insurance plan.
Which Option Should You Choose?
Now that you are aware of the various ways in which the banks offer to provide your nominees or your family with financial support, you must pick a combination. Here are a few things to consider while you are pondering over it.
- Judge things from an overall return perspective. After considering the inflation and devaluation of the currency, you may find it ideal to go for an incremental plan, especially if you have children and if your term insurance plan goes beyond a decade after your death.
- At the same time, it is also possible to invest in the lump-sum. If you are not the sole breadwinner of the family, and your partner/spouse works and earns a steady income, your family may not have to rely on your death benefit to lead a good life. If that is the case, you can arrange for a lump sum death benefit and advise your family to invest a large amount of money in a bank. Inflation will then work in your favor and provide excellent returns over the years once it gains interest. For instance, the smart monthly income plan offered by CANARA HSBC OBC plan offers the following returns, if you took the policy in December 2013. As you can see, your family will be protected for more than twenty years in the future:
|Policy Starts||15th December, 2013|
|Premiums are due on||15th December every year till year 2027|
|1st monthly income||15th January, 2024|
|Last monthly income||15th December, 2038|
- Consider your family's financial literacy – if you think your family will find it difficult to maneuver around bank jargon and the complicated procedures and paperwork, maybe lump sum investment is not for you. On the other hand, if they are entirely unfamiliar with the bank system and you are sure that they will use the large death benefit funds frugally, you can trust them with it. Ultimately, no one knows your family as you do.
- A family that is not familiar with technology and, by extension, scams that use technological literacy may fall prey to con artists. Combined with financial illiteracy, there is always a possibility that their lack of tech-savviness can lead to the loss of the death benefit fund. If you intend to have your family invest the insurance money after your untimely demise, make sure you walk them through the process and warn them against potential scammers.
- Consider the Internal Rate of Return – much like the choice between limited pay term insurance plans and ordinary insurance plans, we must consider the overall savings we can make from choosing from both options. As in the limited plans, there is no significant difference between the internal rate of return in a lump-sum or a staggering amount. The only difference would be that your family would be able to manage their insurance allowance better. The usual internal rate of return is below 7% and can go as low as 4%.
- The small 407% returns are usually free of tax. This makes it more appealing than returns made from FD (Fixed Deposit) rates, in which case income interest would require you to pay tax.
- The premium to be paid every month is significantly higher for the staggered incremental option. If you are not in a position where you can pay off your premiums in a disciplined manner, and if there is the slightest chance that you may miss a premium, it may be better for you to go for an ordinary lump sum term insurance plan. If you are looking solely from a return's perspective, the staggered installment option is far less convenient than a standard lump sum plan.
- That being said, there are other ways to maximize return, even in the case of the lump sum amount. Other than fixed deposit rates, you can use a combination of systematic withdrawal plans, post-office monthly income schemes, credit cards, recurring transfer, and debit funds, and more to get a high internal rate of return.
In conclusion, the pros and cons are more or less equally balanced. While a steady income in the form of monthly installments can ensure that your family is steadily provided, the lump-sum can offer long-term returns if invested in the right manner. The lump-sum option may also help settle any liabilities and provide a quick source of money in health emergencies, expensive occasions like weddings, etc.
To make the right decision, it is paramount that you talk to your bank of choice and get to know more about all the options available to you – they may offer you a fresh perspective that you may not have thought about before. For extra reassurance, you can even ask your peers or an accountant for second and third opinions.
If an expert in financial matters knows your family well enough to suggest the best option for you, that would be perfect. You can also look into your family members' history with large sums of money or coach them before the expiry of the term insurance plan so that they will be able to either invest the money right or carefully use the monthly increments.
The term insurance plan you choose and the consequences of that decision will outlive you. Contact a bank that offers you the package that you and your family need - Canara HSBC Bank can provide you with an excellent term insurance plan that will secure your family's future, letting you live the rest of your life assured that they would be taken care of.