Ch. 17: Claim payout options

With term insurance, you can buy a cover large enough to ensure that your family can continue with their current lifestyle - without disruptions.

In case of your unfortunate demise, after claim formalities, this large cover amount is directly credited to your nominees’ bank account. Your nominee then needs to figure out safe investment avenues and generate the required income to run the house, pay the bills, etc.

Unless your nominee is financially savvy, this money may not be optimally invested or worse can get misused by various people (mis-selling salesmen, family members, etc.) - who are aware of the amount the nominee has received.

That’s where claim payout options come handy in helping you customise how your nominee receives the claim amount.

What is a Claim Payout Option?

While signing up for the policy, you can customise how the claim will be paid out to your nominee. This is called the claim payout option.

Types of Claim Payout options:

1. Lump-Sum Payout

As the name suggests, your nominee or family will receive the entire claim amount (Death Benefit) in one single payment - a lump sum.

However, as you would have guessed, the risk with this option is that a large amount of money coming all at once can be overwhelming. This is especially if the nominee does not have prior experience in managing finances. They may end up making poor investment decisions.

For example, you have purchased a term insurance plan of Rs. 2 Crore sum assured and have opted for the Lump Sum Payout option. Now, if you pass away, the entire amount would be paid to your nominee all in one go, as a lump sum. Your family should have access to the right financial advice to be able to invest the 2 Crores in the right kind of investments - based on the nominee’s long and short term needs.

Benefits?
This is really beneficial when your nominee is financially savvy or has access to a trusted financial advisor. With this option, the nominee is free to invest the money received into the most suitable investment avenues available, based on their financial needs.

2. Monthly Income Payout

The insurer provides your nominee or family with a fixed amount on a monthly basis, for a specific period of time. It acts like a replacement for your monthly income.

Taking the same example of Rs. 1 Crore term cover - If you have opted for the Monthly Income Payout option, the claim amount will be given to your family as Rs. 50,000 per month for the next 200 months (approximately 16 years and 8 months).

This is how it’s different from the Lump-sum Payout option, where they were receiving the entire 1 Crore cover amount in a single payout.

Please note: Some plans also offer an ‘increasing monthly income’ option’. With this, the amount sent to your family on a monthly basis can be increased by 5% or 10% every year. This partially helps in taking care of inflation.

Benefits?
This is a great option if you feel your nominee or family cannot manage large amounts of money together and don’t have any loans to pay off either. If they require just steady monetary support, a Monthly Payout option will be more comfortable.

3. Lump-Sum with Monthly Income

This is the best of both worlds. With this option, you can choose-

• A part of the claim amount to be given to your family in one payment (as a lump sum).
  
• And a part of it to be split into regular monthly payments.

Again, taking the example of Rs. 1 Crore cover. With this payout option, you can choose Rs. 50 lakhs to be paid as a single payment to your family. The rest of the amount - another Rs. 50 lakhs - can be split into monthly income payments based on your preference.

Benefits?
This option is beneficial in most cases, because it gives a combination of options that address both the short-term and long-term expenses of your family.

On one hand, the lump sum will ensure the large debts are paid off, and on the other hand, the monthly payout will secure all their needs. Hence if your dependent is not financially well-versed, opting for this payout option would make perfect sense.

Buying a Term insurance plan is not the end of it. You need to customise it to receive the most benefits, and leave behind a comfortable life for your family. Because that’s what being a family is all about - you might not have it all together, but together, you have it all.