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Claim Payout Options in Term Life Insurance

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    Claim Payout Options in Term Life Insurance


    Claim payout is the final stage in an insurance policy which is also a very important stage as one should be able to identify the payout option that should be exercised by the insurer at the time of claim settlement which would ultimately benefit the family members of the insured. Claim payout can be done in different ways, such as lump sum payout, payout as monthly income, and increasing payout, depending on the option chosen by the insured. Earlier, there was only one claim payout option in which the entire claim proceedings were given to the insured's nominee. Still, in time, many other payment options have been introduced by insurance companies. The variations in payment options could benefit the insured and the insurer. In the case of the insured, the family members would receive the compensation as per their needs and requirements, whereas, in the case of the insurance company, they could settle the claim amount in parts, thereby reducing their burden of lump sum payment.

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    In non-life insurance plans, the claim payout is done on a lump sum basis. Still, in the case of life insurance plans, there are different options for claim payment ranging from lump sum to monthly payments, and even a combination of these plans can be opted by the insured. This article focuses on the claim payout options available in life insurance plans and then explains various factors to be considered before selecting the payout option.



    Types of Claim Payout:
    Broadly, payment options can be of 6 types which are discussed below:

    This is the oldest known payment option and the most common payment option available in life insurance plans. As the name suggests, the entire sum assured would be paid to the nominee or the insured's family members upon their death during the policy period as a lump sum. The family member (s) or nominee (s) can decide how to utilize the sum assured. For example, Mr. Vipul has taken a term life insurance plan of Rs.1 Crore and mentioned his spouse as the policy nominee. If Mr. Vipul expires during the policy term due to any unfortunate event such as an accident, disease, or illness, then the entire Rs.1 Crore would be paid as a lump sum amount to the spouse. It should be specified that the claim will only be paid upon the policyholder's death during the policy's duration. There are many advantages and disadvantages to this kind of payout option which are mentioned below:

    Advantages:

    • A lump sum can be used to clear any existing loans or other financial burdens, such as children's education and marriage expenses.
    • The funds may be invested at the discretion of the insured person's designee.
    • The claim proceedings can be utilized as a source of income for the family in case of the untimely death of the insured, who is the family's bread earner.

    Dis-Advantages:

    • Since the amount is huge, many issues can arise, such as pressure from acquaintances to share the amount.
    • If handled properly, one could retain the amount within a short period of time. For instance, if people decide to spend an amount of luxuries instead of investment, then it might not justify the actual purpose of the insured. There are many instances where we see people with sudden lottery winnings becoming bankrupt within a few years as they need a proper plan to handle the money.

    The other option is the income or periodic option, in which the claim amount would be paid periodically in equal installments. For instance, equal monthly payments for a certain period of time would be paid under this payout type. The period of payments can range from a few years right up to the spouse's death. Let us consider the above example of Mr. Vipul, who had opted for the Periodic payout option in which his wife would get the monthly payout for a certain number of years or till her death. The advantages and disadvantages of income or periodic payment options are mentioned below:

    Advantages:

    • The amount would be received monthly, which can be utilized as an income replacement and helps the family of the deceased insured.
    • It could help clear any EMIs monthly without disturbing the status quo situation.

    Dis-Advantages:

    • Since the amount would be paid monthly in equal installments, it would not factor in inflation. After some time, more than the monthly amount would be needed to satisfy the family's expenditure.
    • Immediate expenses such as child marriage, college fees, or loan clearance cannot be done with the monthly payment option.

    This type of payout is similar to the periodic payout, with an additional option to get increased payment every year. Every year the payment would be increased by a certain percentage. For example, if you have chosen this option and opted for a 5% increase every year, then the payout would increase by 5% every year, applicable on the monthly payout. For example, Mr.Vipul can opt for this payout type and select a 5% increase every year, in which case the monthly or periodic payout would be increased by 5% every year for a certain number of years.

    Advantages:

    • The main advantage of increasing the payout option is that it helps to combat rising inflation. One can select an increment percentage when taking the policy, which would help their family survive the inflation. Inflation would decrease the value of money, and an average inflation of 7% should be considered before selecting this plan.
    • Monthly amounts would be received, which would, in turn, be increased yearly to combat inflation, and this amount can be used for family expenditures.

    Dis-Advantages:

    • The main disadvantage of this payout option is that immediate expenses such as child marriage, college fees, and loan clearance would not be possible.

    This payout option combines the lump-sum and periodic payments in which a certain part of the sum assured would be paid as lump-sum, and the remaining part would be paid in equal monthly installments. For example, Mr.Vipul had taken a life insurance plan worth Rs.1 Crore and opted for a lump-sum and periodic payment option in which he had selected 50% amount as a lump-sum and 50% as a periodic payment. In case of his death, his nominee would get Rs.50 Lakhs as a lump-sum amount and Rs.50 Lakhs in periodic installments.

    Advantages:

    • The claim is paid as lump-sum and as periodic payments, which would help the nominee or family of the insured adjust to the immediate and long-term requirements. Immediate requirements such as child marriage, loan clearance, and college fees can be cleared with the lump-sum amount, and long-term requirements such as monthly expenditure would be taken care of by periodic payment.

    Dis-Advantages:

    • The major disadvantage of this option is that it doesn't have enough room for monthly payments; since a portion of the claim is paid as a lump sum, the amount received as a monthly payout would be less, which might not be able to match the lifestyle of the family members.
    • This option also does not account for lifestyle inflation, in which the expenses would increase over time.

    Lump-sum + increasing payout option is considered the best of all the available options since it tries to address all kinds of situations. Under this option, a certain percentage of the sum assured would be given as a lump-sum amount, and the remaining percentage of the sum assured would be given as periodic payment with an option of increasing every year. For example, Mr. Vipul had taken a life insurance policy of Rs.2 Crore and opted for this option with a 50% lump-sum payment and a 50% payout option. In case of his death, his family would get Rs.1 Crore as a lump-sum amount immediately, after which they would get a monthly amount (say, Rs.50k) with a certain percentage (say, 5%) increase yearly.

    Advantages:

    • The advantage of this payout option is that one can get a lump-sum amount and increase payout every month. The lump-sum amount can be used to clear loans or for immediate requirements such as child marriage, college fees, etc. In contrast, increasing periodic payments would provide for family expenditure while considering lifestyle inflation.

    Dis-Advantages:

    • One disadvantage of this option is that the amount you get as a monthly installment would be less, as a portion of the claim amount goes towards a lump-sum payment.

    The return of premium option is considered a payout option in the case of life insurance plans in which the entire premium paid would be returned to the insured in case of survival of the insured beyond the policy period. The payout would be applicable only if the insured survives the policy period. If the policyholder dies during the policy's term, the assured amount will be returned as a claim reward. This option is available in term insurance plans, but the premium to be paid for plans with this option would be higher when compared to the pure term insurance plans, which do not have any survival benefit.

    Factors to consider while selecting the best claim payout option in Term Insurance

    Many claim payout options are available to the customers. However, selecting the best option while taking the term life insurance plan is important as it plays an important role in claim settlement. One should think twice before opting for the payout option instead of regretting afterward.



    Future Income Requirements

    Future Income Requirements

    One of the major things to consider while selecting the payout option before buying a life insurance plan is your future income requirement. You should be able to calculate the income your family requires to sustain in case of your death. For example, you might have taken a home loan of Rs. 50 Lakhs and have children who would require an amount for marriage and higher studies. Remember, you should decide the payout option as you cannot decide the time of your death, but you can decide how the claim amount can be utilized. Additionally, it is essential to consider what your family may require in the event of your passing. It is important to consider future income requirements and decide properly if you are the only bread earner in your family.



    Current Liabilities

    Current Liabilities

    The other important thing to consider is your current liabilities. Your sum assured or life insurance cover should also factor in your loans. One need not go by the general principle of 10-20 times the yearly income as a sum assured while buying the life insurance policy since it might not reflect your other obligations, such as loans. If you have current liabilities, you can opt for a periodic payment option or a lump-sum + periodic payment option depending on your level of liabilities. If you want to clear the liabilities immediately, you can opt for a lump-sum option or periodic payment option if you want to clear them over time.



    Cash Handling Ability

    Cash Handling Ability

    The most important factor to consider while selecting the payout option is whether your family can handle the claim proceedings. It would be best if you asked yourself the below questions before selecting the payout option:

    • Can your family handle the finances properly in your absence?
    • Does your family have enough exposure to finances?
    • Do they know where to invest the claim amount?
    • Money brings enemies. Can your family members safeguard the amount from your relatives or other people eyeing the amount?



    Children Education/ Any life event

    Children Education/ Any life event

    There can be major life events, such as children's marriage or education, requiring considerable money. It would help to consider such major events before selecting the payout type, as these events cannot be managed with periodic payment options.

    For more details on selecting the payout option in life insurance plans, please book a call with our life insurance experts at Ethika insurance broking.