Lump sum vs instalments: How nominees can receive term insurance benefits after the insured person’s death
People buy term insurance to ensure their families remain financially secure in the event of their untimely death. A term insurance policy is essentially an agreement between the insurer and the policyholder for a fixed period, typically ranging from 10 to 40 years, during which the insurer pays the death benefit to the beneficiaries if the policyholder passes away.
This can help ensure that the insured person’s family has the financial support to handle outstanding debts and expenses in their absence.
Most term insurance plans offer a lump sum payout to the designated nominees when the insured person passes away. Under Section 39 of the Insurance Act, 1938, a policyholder can nominate one or more persons to receive the policy proceeds who can be a parent, spouse or child (including minors).
However, term insurance benefits are not always disbursed as a one-time payout. Nominees may also have the option to receive the monetary benefits in instalments or through a combination of a lump sum and regular payouts, though it depends on the particular policy’s terms.
How does a staggered payment in a term plan work?
A staggered payout option allows beneficiaries to receive the term insurance death benefit in instalments rather than as a lump sum. Payouts may be monthly, annually or in the form of an increasing monthly income, depending on the plan and insurance company, according to a Tata AIA blog post.
In the monthly payout mode, a nominee receives the death benefit in equal instalments for a fixed period of months or years. In the increasing income monthly mode, they receive proceeds in monthly instalments for a set period.
However, each month or year, the percentage of the monthly income received increases to help you adjust and negate the effects of inflation. In the annual payout option, the nominee receives the income in annual instalments.
Also, there is another payment mode that combines the lump sum plus monthly income options. In this case, the nominee receives a percentage of the total death benefit as a lump sum and the remaining amount is paid out in monthly or annual instalments as chosen. Most term plans provide 50% to 60% as a lump sum and split the remaining 40% to 50% in equal instalments, the blog post noted.
Can you change the payment mode later?
A policyholder is asked to choose the death benefit payout mode while buying the term plan, whether online or offline. The blog post states that this mode usually cannot be changed later but it’s best to check your options with the insurer.
Beneficiaries can receive the death benefit as a lump sum or in monthly instalments for up to 120 consecutive months. A policyholder can pay the premiums on a monthly, quarterly, half-yearly or yearly basis.
In addition to the basic coverage of a term plan, a person can also make top-up additions to their term policy when new life stages needs arise. These additions will increase the amount of life coverage that their family will receive.
