The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "Two roads diverged in a wood and I took the one less traveled by, and that made all the difference." ~ Robert Frost

Innovative Regular Payout in Term Plans

As you are aware, a standard term insurance policy pays out the 'Sum Assured' as a lump sum to the nominee in case of death of the insured. This protects the family of the insured against any financial difficulties. 

But, if the insured survives the term of the policy, there is no payout. 

Since term plans help in providing adequate insurance cover at very reasonable premiums, they are the best way to insure one's family.

Given the competition, it is but natural for insurance companies to bring innovation to the basic product that may benefit the insured more than the plain vanilla product. Of course, this innovation may come at a cost. Hence, we have to ascertain whether paying this extra cost is worth getting the extra features.

One variant is the Return of Premium option, which is not really a worthwhile option to have. Under this option, you get back the total premiums paid if you survive the policy term. This provides a great 'emotional' comfort to many people as they feel that they will at least get all their money back. However, you have to pay extra premium to enjoy this benefit. And if you invest this additional premium yourself, you are likely to get a higher payout than just the return of premiums. Hence, this innovation is generally avoidable. (See 'Return of Premium' option in a Term Plan is a strict NO, NO & NO)  

Another innovation is paying a certain lump sum amount upfront to the nominee on the person's death and thereafter follow it up with a regular payout for a certain number of years. 

A few of the variants available under this broad strategy include:
a) 10% of the Sum Assumed paid upfront and the balance 90% spread out annually over the next 10-15 years
b) Sum Assured paid upfront + a certain fixed sum paid every year for the next 10 years
c) Sum Assured paid upfront + a certain sum, increasing every year by 10%, paid for the next 10 years. 

One of the key advantages of this strategy is tax. Suppose only the lump sum money was paid to your nominee which was say then invested in bank FD. Then the return from the bank FD would be taxable. Whereas the annual payout received under the term plan would be tax free. 

Secondly, if your nominees / dependents are not financially savvy, regular payout from the insurance company would be more convenient for them than managing the money themselves.

Thirdly, it gives that all important breathing space to the family to first get over their grief and later think of all the money matters when they are composed enough to make right decisions. 

This is a really interesting innovation and worth exploring. 

In fact, as I had mentioned in one of my earlier blogs 'Buy only Term Plans...and buy them the Smart Way', it is ideal to take 2-3 term plans instead of single policy for the entire Sum Assured. Hence, now you have the choice to buy different types of term plans and build a more comprehensive protection for your family.

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