Term Insurance: Should You opt for Lump Sum or Monthly Pay-Out plan?


Generally, term insurance is perceived as one of the simplest forms of life insurance available in the market. Its working is easy to understand for all. In term insurance, you pay the premium for a specific period, i.e., the policy tenure and in return, the insurance agrees to pay the death benefit in lump sum to the nominee in the event of your unfortunate demise during the policy period.

However, over a period, as the insurance market in India and the needs of the people have evolved, the insurers have introduced several variations in the term insurance pay out. These variations are for the benefit of the policyholders and their family members. Today, when you buy a term plan, you have the flexibility to choose between lump sum pay out or monthly pay out.

As a first-time term insurance buyer, if you are confused, which is better? Let us know more about lump sum payout and monthly pay out term insurance plans.

Lump Sum Payout Term Insurance Plan

A standard term insurance policy offers a lump sum payout equal to the sum assured to the deceased policyholder’s family. However, if you outlive the policy term, your family does not get any maturity or survival benefits. 

The premium for such policies is generally low compared to other life insurance policies and you do not get back the premium.

Staggered or Deferred Payout Term Insurance Plan

Many Indian families do not have sufficient financial knowledge and they fail to make the best use of a lump sum amount they receive from the insurance company. So, to address this critical concern, the insurance companies now offer different payout options like monthly pay out or periodic pay out.

Under this option the beneficiary receives the sum assured in small instalments every month or periodically rather than receiving the entire amount in a simple payment. In other words, the monthly or periodic payout plans provide a regular income to the family, and it acts as an income replacement.

There are different types of different payout options, which are discussed below:

Lump sum with increasing monthly income

Under this plan, the insurance company pays a specific percentage of the sum assured in lump sum and the remaining amount is paid in monthly instalments. Every year the monthly instalments increase by 10% to 20%. This is an excellent pay out option as it helps your family deal with the rising inflation. And the lump sum amount can help them take care of significant expenses like loan repayment, etc. 

Total sum assured in increasing monthly income

This type of term insurance pay-out plan is very similar to the lump sum with increasing monthly income. The only difference is you get the entire sum assured in smaller instalments, which increases by a specific percentage every year and there is no lump sum pay out.

Total sum assured in monthly income

In this plan, the beneficiary receives the total sum assured in equally divided monthly instalments over a fixed period.

Term insurance gives your family the financial security they need

All earning individuals must purchase a term plan, especially if they are the breadwinner of the family. Both lump sum pay out and monthly pay out plans have their own benefits. You must analyse your family’s needs and choose a suitable plan.