What Are Life Insurance Settlement Options?

The hardest thing in the world is to grieve the loss of a loved one. During such an emotionally draining situation, the last thing you would want your family to worry about is money - and, that's why you need life insurance. Life insurance is a crucial step for ensuring the financial security of your family members when they do not have your shoulders to rely on. The claim amount can be a major source of comfort for your family, letting them concentrate on their emotional needs - without worrying about their finances.

But, what if your nominee isn’t financially well-versed? A huge sum of money can confuse them and they may end up making a wrong financial decision - leading to even more problems.

That's why life insurance gives you the option to tailor how the claim amount is paid out to your nominee, so it can be used effectively to meet their financial goals.

What are the claim payout options available under the life insurance policy? Let's discuss in this article.

What is a Claim Payout Option?

You can choose how your nominee will receive the claim payout when you buy the policy. This is known as the claim payout option.

Types of Claim Payout options

1. Lump-Sum Payout
The entire claim amount (death benefit) will be paid to your nominee as a lump sum. If you have unsettled loans/liabilities, this option is a suitable one. The lump sum can be used to pay off the outstanding loans/liabilities.

Example: Isha has purchased a term insurance plan with a sum assured of Rs. 1 Crore. She has opted for a lump-sum payout option. If Isha passes away, the entire amount would be given to her nominee as a lump sum. Her nominee must be financially adept to be able to invest the 1 Crore in the right investment options based on the family's long and short-term needs.

When can you choose this option?
You can choose this option if your nominee is financially savvy or has access to a trustworthy financial advisor. This option allows the nominee to invest the funds according to their financial needs into the most suitable investment avenues. It is also a good option if you have outstanding debts that may befall your nominee’s shoulders if you pass away, the lump sum will help them pay off the amount without stressing about it.

When can you skip this option?
Receiving so much money all at once can be pretty stressful, so this option is quite risky, particularly if your nominee lacks prior experience managing money - leading to poor investment decisions.

2. Monthly Income Payout
Under this option, a fixed amount is paid to your nominee every month for a specified period of time by the insurer.

It serves as a steady stream of income and will lessen the financial burden on your spouse. They can use this money for their everyday expenses like school fees, grocery bills, and other daily household expenses.

Let’s recall Isha’s example. If she has opted for a monthly income payout, the claim amount of Rs 1 crore will be given to her family in the form of instalments on a monthly basis.

Note: Some plans also give you an ‘increasing monthly income’ option’. This option allows you to increase the money your family receives on a monthly basis by 5% or 10% every year - thereby helping your family beat inflation to some extent.

When can you choose this option?
- You may want to consider this option if you feel that your nominee is incapable of managing large sums of money, and you don't have any loans to be repaid. Payouts on a monthly basis would be more appropriate if your family only requires steady financial support.

When can you skip this option?

• This option is not suitable if you have to settle major loans in a short period of time. Your family will have to shoulder the repayment burden in your absence.
• You can also skip this option if your family is capable of managing large amounts on their own or with the assistance of a good financial advisor.

3. Lump-Sum with Monthly Income Payout
Under this option, your family will receive a part of the claim amount in one payment as a lump sum and the remainder will be paid in regular monthly instalments. Depending on the product, you have the option to choose the percentage of the claim amount you want your family to receive as a lump sum. And, the rest of the claim amount will be paid as monthly income.

Example: Taking Isha’s case again. Say she has opted for a lump sum with a monthly income payout. She wants 50% of the amount to be paid as a lump sum and the remaining 50% to be converted into monthly payouts. In this case, Rs. 50 lakhs will be paid as a single payment to her family. And, the remaining Rs. 50 lakhs shall be divided into monthly instalments according to her preference.

When can you choose this option?
The advantage of this option is that it covers both short-term and long-term expenses since it combines both lump-sum and monthly income options. While the lump sum shall cover your large debts, the monthly payout covers your family's everyday needs. This payout option is a viable one if your nominee is not well-versed financially.

When can you skip this option?
This option should only be avoided if you are purchasing the life insurance plan for a specific purpose - say you only want to pay off a loan with the amount or perhaps you want to provide your family with a monthly income replacement.

Summing up!

Life insurance claim amount can address a variety of needs, giving your family the financial resources they need to continue building their lives even in your absence. In order to invest this amount in good investment avenues, your nominee must be financially savvy or have access to the right professional guidance. Take some time to weigh the pros and cons of each of these life insurance settlement options before making a decision.