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Which Claim payout option is better in Life Insurance 

Life insurance is a form of financial planning done by an individual or entity for the long term. Life insurance is a way of securing your loved ones from the financial crisis in the event of your sudden demise. Basically, life insurance can be described as the contract between insured and the insurer in which the latter agrees to pay a designated amount to the former in case of any event covered under the policy in exchange for a premium.

While selecting the life insurance policy, due research is to be done before finalising the insurance and the same amount of research is to be done on the claim payout option. The claim payout is the amount paid to the nominee of the insured in case of sudden demise of the policyholder.

Mr. Bean in his early twenties started planning his financial goals and decided to have life insurance policy. He did an extensive research and decided to go for a term insurance policy to cover his life against any certainties. But he was not able to decide the mode of claim payout in his life insurance policy. It is equally important to select the best mode of claim payout in the event of death of the policy holder.

Let us understand the popular types of payout and how to select the best option:

S.No Benefit Lump Sum Payout Monthly Payout Lump sum + Monthly
1 Definition In the event of death of the policy holder, the sum assured mentioned in the policy is paid entirely in a lump sum manner to the nominee and the policy ceases to exist. In this option upon the death of the insured, the sum assured is paid in equal monthly instalments to the nominee for a specified number of years. Once the period is over, the policy ceases to exist. This is an option where a part of the Sum assured is paid upfront as lump sum and the remaining part is paid monthly to the nominee in the vent of death of the insured. The percentage of lump sum amount and monthly payout can be decided by the insured at the time of purchasing the policy.
2 Premium The premium to be paid in this option is quite less compared to the other options. Premium is high compared to the lump sum payout option. Premium is higher compared to the other two payout options.
3 Pros
  • If you have debts which are to be repaid immediately
  • High credit card balances.
  • Housing loans, mortgages or other types of loans.
  • Can help as the monthly income of the family to manage expenses.
  • Easy to pay EMI for any loans and mortgages.
  • A part of the claim amount received can be used to clear the debts and the remaining amount received in monthly instalments can be used to manage the expenses.
4 Cons
  • Can lead to bankruptcy if proper planning is not done.
  • Sudden wealth may be misused to make unwanted purchases thereby spending most of the claim amount.
  • Loans or mortgages cannot be cleared immediately
  • There would be minute increase yearly which would not be sufficient to beat the inflation.
  • No such mentionable disadvantage under this payout option.
5 Tax Tax free as the proceedings is from life insurance claim. Annuities accrue interest and are subject to be taxed under the income tax act. Tax is to be paid only on the interest amount received if any.

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