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Term Plan Lump-sum Vs Staggered Payout: And The Winner Is...

As has been repeatedly advocated by one and all, Term Insurance Policies are the Simplest, Cheapest and THE BEST way to buy life insurance cover.

There cannot be any debate on this.

However, what is good for you, is not-so-good for the agents and insurers.


They don't make any meaningful money on these policies.

So, they rarely talk about such plans.

Or, they innovate!

But, to be fair to the insurers, there is one more reason why they have to add "masala" to the plain and simple term plans. 

The plain vanilla term insurance policy, with no exotic add-ons, is exactly like your vehicle or health insurance policies. If something untoward happens, the insurance company pays for it. But, if you survive the policy term with no damages, you get nothing for the premium(s) paid.

Indians don't like this! 

With no tangible returns at the end of the policy term (or in between), they don't prefer such policies. I guess, they don't consider the intangible benefit of 'security cover', as 'worth' the cost.

Instead, they willingly and happily buy the endowment or moneyback type of policies, merely because these offer returns. The fact that such returns are abysmally low, does not matter to the policy buyers. Safety of their capital and tax-free income, are good enough reasons to pump in thousands of crores as premiums every year into these 'worthless' policies.

Hence, one innovation introduced by the insurance companies is the 'Return of Premium'. As the name suggests, all the premiums paid by you are "returned back" to you, at the end of the policy term. 

This may look like a brilliant idea:

However, as I have already warned you...
... 'Return of Premium' option in a Term Plan is a strict NO, NO & NO.

The fight between Lump-sum and Staggered Payout on Term Plans is one-sided.

Another innovation is the Staggered Payout.

Normally, on the death of the insured, the entire Sum Assured is paid as a lump-sum amount to the family of the deceased.

However, as is clear from the name itself, under the Staggered Payout option the Sum Assured is paid in installments, over say a period of 10-15 years. 

Different policies come with different variations of the same. For example,
- some policies pay part amount as lump sum and the balance in monthly installments
- some policies pay the entire amount in "fixed" installments
- some policies pay the amount in installments that "increase" 5-10% every year.

This strategy, as explained in an earlier post 'Innovative Regular Payout in Term Plans', has its advantages.
1) The monthly payouts, that the family receives, are tax free.
2) Since the corpus remains with the insurance company, financially non-savvy persons are relieved of the burden to manage such a large sum of money.
3) The money is safe from unscrupulous and greedy relatives.

Unfortunately, however, in many such policies the above benefits come at a very steep cost. 

Let's take one or two representative examples.

Example 1:
A term insurance policy with Sum Assured as Rs.1.crore will pay you monthly installment of Rs.1.20 lakhs for 100 months.

This effectively works out to a return of around 4.48% only.

Example 2:
A term insurance policy with Sum Assured as Rs.1.crore will pay you monthly installment of Rs.87,200 per month in the 1st year; and increasing at 5% every year till 10 years.

This effectively works out to a return of around 5.27% only.

As you will surely appreciate, it would be ridiculous to keep your money at such low rate of returns. Even a simple bank fixed deposit will give much higher interest rates (even if taxable).

Plus, the money gets locked-in. Should any need arise in these 10 to 15 years e.g. children's education, marriage, medical emergency etc., there is simply no access to this sum.

Some advisers feel that the risk of mismanaging and losing the money is quite high, if the family members are financially illiterate. So cost should not be a deciding factor. Such people should still go for the Staggered Payout Term Insurance policies.

I strongly disagree!

Financial ignorance is a curse. It is very important for all of us to have at least the basic financial understanding. Instead of paying high cost to the insurance companies, it would be lot cheaper and better for everyone in the family to acquire some financial knowledge. This would not only help them manage the insurance money, but also be very useful — for their entire lifetime — in taking care of the other day-to-day money matters.

Caution: In some policies the premium payable is the same, whether you opt for lump sum payment or staggered payout. However, be very careful... in many policies the premium on staggered payout option is MORE than the lump sum payout option.

Therefore, while on the face of it this innovation too looks like a brilliant idea, it is definitely not worth the cost.

So, don't fall into the trap of jazzy advertisements and (seemingly) alluring benefits.

Ideally, avoid.

Stick to the no-frills term plans... and buy them the Smart Way.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

101 Classic Tips Money Gyaan

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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