Term life insurance purchase appears high on many millennials’ ‘new year resolutions’ list, as a lot is written about the protection need of an individual. The ease of buying term life insurance makes many check the premium online and even fill up the form on the website of the desired life insurer. But the challenge arises when the insurer throws up multiple options to settle future claims. Let’s look into the details of how these options work and which one you should choose.
Lump-sum payment: This is the most popular and traditional way of settling claim under a term insurance agreement. Upon death of the policyholder, claim is paid to the policyholder in one go. The nominee of the policy is free to decide how he wants to use the funds.
Here the nominee is expected to judiciously use the proceeds of the policy. If the money is used without keeping in mind the long-term needs of the family, then the family may suffer.
Regular income for the family: This is an option that is catching up with many term life insurance buyers. The insurer promises to pay the sum assured in equal instalments over a stipulated period of time – equal monthly payouts are done by the insurer over a period of ten years. The only drawback of this option is no lump-sum money is available. If the life assured has a large loan such as home loan or a business loan outstanding, then such a loan cannot be closed immediately with the help of this claim settlement option. To overcome this issue, one can look at the next claim settlement option. Generally this is the cheapest premium option as the life insurer releases the claim money over a period of time.
Since the monthly payouts remain the same over the payout tenure of around 10 years, some individuals find it unattractive. They can opt for increasing regular income for the family too. In lumpsum payment with increasing regular monthly income option the payout in the initial year is lower than the later year, the premium too is seen a little lower than the lumpsum payment with regular equal monthly income.
Lump-sum payment and regular income till child attains age of 21 years: This claim settlement option is an attractive one for individuals with a child. The nominee is paid a large chunk of the sum assured upon death of the life assured and the rest is paid in equal instalments till the child turns 21. The premium also depends on the age of the child as it varies the pay-out structure.
Harshavardhan Roongta, chief financial planner of Roongta Securities says, “The best option among these would be to opt for lump sum at the time of death. The regular income option does not account for the time value of money as the insurer simply divides the sum assured by the number of instalments.” It is better to educate the family members about how to use the money so received, he adds.
The family should be told about both the purchase of the life insurance policy and how to use the claim money. This will ensure that the family uses the proceeds in the right manner -repay debt and invest with a view to fulfil the financial goals of all survivors. “One should always opt for lump-sum claim settlement option while buying term life insurance policy. If you think that your nominee or the family members are not capable of prudently using the money received at the time of death claim, you can consider taking regular income option. But that should be seen as the cost of lack of financial awareness,” says Saji George, founder and CEO of policylitmus.com, an online insurance aggregator company. source : moneycontrol