Lump-sum or regular payout?

Opt for a life insurance benefit that suits your needs — ideally, a mix of the two

For most of us, buying a life insurance policy is fairly the easy part. When it comes to deciding on how much life cover would be adequate, things get a little trickier. But thanks to numerous online calculators and pre-set thumb rules, working out your life cover is no longer a painstaking job. But how often do we think about how the life insurance benefit, on death, should be paid out to our dependents?

Sometime back, insurers offered only one mode of payout — lump sum. On death of the insured, the entire benefit was passed on to the dependents. But, now, insurers also offer staggered payout options.

We look at what’s on offer and the pros and cons of various alternatives to help you arrive at an option that best suits your needs.

On offer

Understanding a lump-sum option is easy. On death of the insured, the dependents will get the full benefit. But are they financially savvy to put the money to good use?

Here is where insurers make their pitch for staggered or monthly payout options. Instead of a lump-sum payment, your dependent will receive the insured amount as monthly instalments over a period of time. It could also be a combination of lump-sum and staggered payout. For example, instead of receiving ₹1 crore as a lump-sum death benefit, you can opt for a ₹50-lakh lump-sum payment on death and the balance as monthly instalments for 10 years to your dependents.

Within these broad choices, insurers offer a menu of different options.

HDFC Life Click 2 Protect 3D Plus offers the most flexibility. You can decide on the amount of payout, the payout period (maximum 20 years) and the rate increase every year.

Premiums vary across options. For a 35-year male, opting for a ₹1 crore cover and policy term of 20 years, the premium works out to ₹10,876 in case of a lump-sum option; ₹10,015 for the income option (₹50 lakh lump sum and the balance monthly over 10 years) and ₹11,405 for a 10 per cent increase in monthly payout under income option.

ICICI iProtect Smart and Max Life, in comparison, offer lesser flexibility.

There is no choice on the payout period or the rate of increase. But the premiums are slightly lower than that of HDFC’s 3D Plus.

Under ICICI iProtect’s regular income option, a fixed 10 per cent of the death benefit is paid every year for a fixed period of 10 years. Under an increasing income option, the income amount increases by 10 per cent (simple interest) every year.

In case of lump-sum-plus-monthly payout option, you can choose the percentage of benefit to be paid as lump sum. The balance will be paid out as equal monthly instalments over 10 years.

The premium works out to ₹10,550 in case of a lump sum option; ₹9,760 for the income option (₹50 lakh lump sum and balance monthly over 10 years) and ₹13,293 for increasing income option.

Under Max Life, you have an option of receiving lump sum plus 0.4 per cent of sum assured for 10 years (with an option of 10 per cent increase every year).

For the lower flexibility that it offers, Max Life’s policies are cheaper than the rest (per lakh cover). The premium works out to ₹9,204 in case of a lump-sum option, ₹6,726 for income option (₹50 lakh lump sum and ₹20,000 monthly over 10 years — a total life cover of ₹74 lakh).

So, which one should you go for?

Each option has its merits and disadvantages.

The right option

Purely on returns, the monthly payout options may not make the cut. For instance, under ICICI iProtect’s regular income option, the entire death benefit is split over 10 years. Hence, considering the time value of money, receiving the entire ₹1 crore life cover today would obviously be worth a lot more than getting it over 10 years.

In case of ICICI’s increasing income option too, that fetches you 10 per cent simple interest, returns may not be attractive when other options such as bank FDs, post office schemes or debt mutual funds are considered. Also, in case of ICICI iProtect, the premium for the increasing income option shoots up by 26 per cent over a regular lump-sum option.

That said, not everyone may be financially-savvy to invest the lump-sum money. In such cases, a guaranteed monthly income for a policy taken today, say, 30-40 years from now, may not be such a bad idea.

Hence, if you are unsure about leaving large amounts to your dependents, go for a combination of lump-sum and monthly payout. The lump-sum portion can take care of immediate liabilities, if any, that your family may need to settle. The balance doled out as monthly payouts can fulfil the family’s needs in your absence. Premiums of policies with lump sum and monthly payout option are also cheaper than regular lump sum policies.

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