Term insurance is one of the preferred investment option to protect a family from the after effects of unpredictable events like the sudden and untimely death of an earning member. It keeps your family from going into financial distress arising out of loss of income.
One of the main advantages of term insurance in India is the fact that it comes with flexible benefit payout options. This effectively means that you can receive term insurance benefits either as a lump sum payment or as monthly income. There are multiple benefits that you get to enjoy when you opt for lump sum payouts.
However, before we get into the nitty grittiness of lump sum payments, let us first take a look at the concept of term insurance, how it works, and get an in depth understanding of lump sum payouts.
What is term insurance?
Term insurance is a form of a life insurance policy that provides your nominees/beneficiaries with financial security in the event of your demise. When you buy term insurance online, your beneficiaries/nominees become eligible for a death benefit, which is essentially a predetermined sum of money. This benefit is paid out to them in the event of your death during the policy tenure.
In case you survive until the end of the policy tenure, you will not be eligible for any payouts like maturity benefits. It is for this reason that term insurance policies usually charge a lower amount of premium when compared with other forms of life insurance.
How term insurance works?
Now that you know what term insurance is, let us briefly look at how it works.
Assume that you purchase a term insurance policy with an insurer. The policy offers Rs. 10 lakh as death benefit sum assured and the tenure is 20 years. Moreover, in exchange for the Rs. 10 lakh cover, you are required to pay Rs. 3,000 each month for the whole tenure of 20 years. Now, in the event of your death during the policy tenure of 20 years, the insurer will pay out the death benefit of Rs. 10 lakh to your nominees/beneficiaries. However, if you manage to survive until the end of the policy term of 20 years, no such benefits are payable to either you or your beneficiaries/nominees.
That said, you could also make use of a term insurance calculator to help you better understand the workings of a term insurance plan.
What is lump sum payout in term insurance?
When the insurance provider pays the death benefit sum assured to your beneficiaries/ nominees as a single payment, it is termed as a lump sum payout. To put it in simpler terms, in a lump sum payout, the entire sum assured amount is paid out to your beneficiaries at once. For instance, in the example given above, the insurer pays out the entire sum assured amount of Rs. 10 lakh to your beneficiaries/nominees in the event of your death. This is a classic example of a lump sum payout.
In fact, while the lump sum payout is the most popular form of insurance payment, you could also choose to receive the sum assured amount in parts as monthly income.
Benefits of opting for lump sum payouts in term insurance
By opting for a lump sum payout, you get to enjoy several benefits. Here is a brief look at some of them.
1. Gives more freedom
The monthly income payout option can be quite rigid in nature. While it might be okay for taking care of your family’s monthly expenses, it does not give them much freedom to do anything else. Lump sum payouts, on the other hand, give them complete freedom with respect to the usage of the death benefit. In fact, your beneficiaries/nominees could use the large payout in whichever way they want to.
2. Helps meet large expenses
A lump sum payout can help your family tide over large expenses with ease, which may not always be possible with the monthly income payout option. For instance, your beneficiaries/nominees could use the lump sum payout to fund your child’s education, marriage expenses, or even settle any large debts that you may have left behind.
3. Can be invested
If you have opted for a large enough sum assured amount, your beneficiaries/ nominees can invest a part of the lump sum payout even after budgeting for all of their expenses. By investing the remaining lump sum insurance payout, they can make use of the power of compounding to receive much higher returns. This would enable them to satisfy their life goals and objectives easily and comfortably.
When buying term insurance in India, it is always a good idea to opt for the highest possible death benefit sum assured amount. This way, you can give your dependents some much-needed freedom with respect to the utilization of the amount. Also, whenever you are in doubt, always use a term insurance calculator to make sure that you are able to afford the premium payments.