Term Insurance - Claim Payout Options

Did you know that the winner of Season 5 of Kaun Banega Crorepati won Rs 5 crores and went bankrupt because of poor investment decisions? We have heard of many such real-life cases where winners of bumper lotteries or gameshow, 5-minute celebrities, or professional sportspersons have lost humongous amounts because of their lack of financial aptitude.

Your loved ones can face a similar situation when it comes to the claim settlement of your term insurance plan. The claim settlement amount materialises in the form of a huge sum of money, which is paid to your nominee. It is then up to them to make the best use of such funds to further invest for their future or utilize them for their everyday expenses or to repay any loans.

But, they might face two major problems. One, any creditors or relatives may swoop in to ask for their share. Two, the financial windfall may overwhelm your nominee, especially if they aren’t well-versed in handling large sums of money.

So, how do you make sure that the money your nominee receives is used effectively?

Let’s have a look!

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Claim Payout Options

A term insurance plan can be customised to tailor your unique needs and requirements. One such customisation is the ‘claim payout option’, i.e., you can decide how the claim amount will be paid to your nominee.

Types Of Claim Payout Options

Term insurance plans come with different types of claim payout options. You should make the choice based on your financial liabilities and the nominee’s financial aptitude.

So, the most common types of claim payout options are -

  • Lumpsum Payout
  • Monthly Payout
  • Lumpsum + Monthly Payout

Let’s discuss each of these options in detail, so you know which one to pick!

  • Lump-Sum Payout Option

    Your nominee will receive the claim amount in a single shot as a lump sum amount. Choose this option if you are sure that your nominee is financially savvy or has a trustworthy source of financial advice. This will help them invest the money wisely or use the funds in the best way concerned.

    With a large sum of money comes responsibility and also a lot of anxiety. There are scenarios in which the money is poorly handled or invested. Hence it would be wise to make sure your nominee can manage finances effectively.

    For example,Josh buys a term policy with a cover amount of Rs 90 lakhs and a policy term of 40 years. He chooses the lump sum claim payout option since his wife, Rosa, is financially adept. He has a home loan worth Rs 55 lakhs.He passes away in the 3rd policy year. His wife can now repay the loan with the cover amount and she has the aptitude to put the remaining funds to good use like reinvestments, daily expenses, etc.

    Choose this option if Skip this option if

    Your nominee has the financial aptitude to make the right decisions, so they can use the money effectively.

    A lump sum is an excellent way to pay off any loans and liabilities that you prefer to settle as soon as possible so your family can live debt-free.

    You are not confident that your family has the financial knowledge to utilize a huge sum of money efficiently or if you don’t have any loans/liabilities.
  • Monthly Income Payout Option

    You can choose the claim amount to be disbursed as monthly payouts until a specified period. In other words, the payout is more like regular income for your family.

    For example, you buy a term policy with a cover amount of Rs 1 crore and choose the monthly payout option. Here, if you pass away while the plan is active, the claim value will be segregated and paid to your nominee monthly. You can choose the number of years during which they will be given the payouts.

    You could also choose the increasing monthly income option that increases the monthly payouts by 5-10% every year. This might be useful for your family to deal with increasing financial responsibilities as well as rising inflation.

    Choose this option if Skip this option if
    Your nominee or family cannot handle huge sums of money and you want your family to be supported by monthly payments to manage their needs. You are sure that your nominee can handle lump sum cash effectively and if you have major loans that need to be repaid quickly - so your family can avoid the burden.
  • Lumpsum With Monthly Income

    This is a combination of both the above-mentioned options. Here the total claim value is split into two parts:

  • One part is paid to your nominee as a lumpsum amount
  • The remaining part is split into period monthly payouts

You can choose for your nominee to receive a percentage of the claim as a lump sum. The rest will be paid as monthly installments.

For example, you buy a term policy with Rs. 1 crore coverage. You can choose for your nominee to receive 50% of it as a lump sum. So, Rs. 50 lakhs will be given to your nominee as a single shot payment and the remaining Rs. 50 lakhs will be split into monthly regular payouts.

Choose this option if Skip this option if

You want to manage both the short-term and long-term expenses of your family. You have debts or loans of lesser value to be paid off.

This will ensure that your family is free from debt repayment quickly and that they don’t lose the money due to poor investments. Hence, they will be financially protected in the long term.

You are buying the term plan for a dedicated, single purpose.

For example, you only want your family to pay off existing loans if you pass away before repaying them. Or you only want to provide a monthly income replacement for your family.

Conclusion

Choosing the right term policy and combining it with the right customizations is what is going to ensure your family is financially secure. By choosing the right claim payout option, you can make sure your family uses the claim amount effectively and has a secure future.

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