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Term life insurance: Should you opt for lump sum payout or staggered payout?

When you buy a term insurance plan, it comes with the option of receiving the total sum as a lump sum or in the form of staggered pay-out. Read on to know which one to choose.

  • 5,279 Views | Updated on: May 30, 2024

Term insurance is gaining popularity as one of the most valuable forms of insurance to protect your loved ones’ financial future. The main reason for its popularity is its affordability. Term insurance provides high coverage at lower premiums compared to other life insurance policies.

In the event of the policyholder’s demise during the policy tenure, the insurance company pays the policy benefits, i.e., the sum assured to the nominee. Generally, the insurers pay the death benefit in a lump sum. However, if you think that your nominee is not too financially savvy and would better suit them to receive the death benefit in a staggered manner, you can choose the deferred pay-out option.

Let us look at both these pay-out options work so that you can make the right choice.

Lump sum Pay-out

When you purchase term insurance, you must pay the premium periodically throughout the policy tenure. If you unexpectedly pass away during the policy period, the nominee will receive the death benefit amount as a lump sum.

They can then use the amount to take care of their daily expenses, manage future expenses, etc. This is how a traditional term plan that has a lump sum pay-out option works.

Staggered or Periodic Pay-out

Sometimes, the nominee may find the lump sum death benefit pay-out hard to manage since they will receive it in one go as a large amount. To make matters easier for them and help them manage the death benefit, insurers have come up with the option of staggered payment, wherein the death benefit is paid at periodic intervals. This regular payment best mimics a monthly income, and the nominee can manage the money more efficiently.

There are different types of staggered pay-out options available.

Monthly Income

In this case, the pay-out is made entirely in equal monthly instalments for a fixed duration. Such a plan is most suitable for people used to a monthly income.

Increasing Monthly

As the name suggests, this type of pay-out involves payment of the total sum assured in increasing monthly instalments. The pay-out amount may increase by 10% to 20% every month until the entire assured sum is paid.

Lump sum with Monthly Income

Under this pay-out option, a percentage of the assured sum is paid as a lump sum, while the rest is paid in equal monthly instalments.

Lump sum with Increasing Monthly

If you choose this pay-out option, the insurer will pay a part of the sum assured in a lump sum and the remaining amount in increasing monthly instalments.

Which one is more suitable?

Whether you go for a lump sum pay-out, or a staggered pay-out depends entirely on your requirements. If you believe that the nominee can use the death benefit responsibly, you may choose a lump sum pay-out.

Also, if the death benefit is going to be used to pay off large debts, then a lump sum pay-out is better. However, if you think the death benefit should be used to replace your monthly income, then a staggered option may work better for you.

In the end, you have to analyse your family’s expenses in the future and decide on the best pay-out plan.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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