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. Life insurance can be described as the contract between the 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 finalizing 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 the sudden demise of the policyholder.
Table of Contents:
What Is Life Insurance Payout?
A life insurance payout option is a form of payment that an insured person can choose at the time of a life insurance claim. Life insurance payout is the money that you receive when you die. It is usually a lump sum payment of your life insurance policy. The decision of selecting a payout option should be based on financial understanding, financial liabilities of your family, and other objectives.
Benefits of Life Insurance Payouts
Life insurance is a type of insurance policy that pays out a lump sum in the event of death. The main purpose of life insurance is to provide income for dependents or family members after the insured person dies.
- There are many benefits to life insurance payouts, which include:
- Providing financial stability for dependents or family members
- Providing a sense of security
- Helping with medical bills and funeral expenses
- Helping with mortgage payments, college tuition, and other debts
Types of Life Insurance Payout Options
There are different types of life insurance payout options:
- Lump sum Payment
- Return of Premium
- Income
- Income+ Lump sum Payment
- Increasing Cover
Lump Sum Payout Option
The lump-sum payout option is the most popular. In the event of the death of the policyholder, the sum assured mentioned in the policy is paid entirely in a lump sum manner to the nominee.
For an instance, Mr. Ashok brought a policy with a sum assured of Rs.10 Lacs. In case of the sudden death of the policyholder, the nominee will receive a payment of Rs. 10 Lacs in a lump sum manner.
Return of Premium Payout Option
In this payout option, premiums paid by the policyholder under a life insurance policy will be returned by the life insurance company to the policyholder in case the policyholder survives the policy period. In case of death during the policy period, the nominee would receive the sum assured amount.
For an instance, Mr. Amar brought a policy with a sum assured of Rs. 10 Lacs at a Premium of Rs. 15000 with a policy term of 20 years. In case of the sudden death of the policyholder, the nominee will receive a payment of Rs. 10 Lacs. However, if Mr. Amar survives during the policy term, will receive all the premium amount he paid during the policy term.
Income Payout Option
In this payout option upon the death of the insured, the sum assured is paid in equal monthly installments to the nominee for a specified number of years.
For an instance, Mr. A brought a policy with a sum assured of Rs. 10 Lacs. If he suddenly died the nominee of the policy will receive 1 Lac per year for 10 years.
Income + Lump Sum Payout Option
This is an option where a part of the Sum assured is paid upfront as a lump sum and the remaining part is paid monthly to the nominee in the vent of the death of the insured. The percentage of the lump sum amount and monthly payout can be decided by the insured at the time of purchasing the policy.
For an instance, Mr. A brought a policy with a sum assured of Rs. 10 Lacs. If he suddenly died the nominee of the policy will receive 5 lacs in a lump sum manner and the remaining 5 lacs will be paid in a monthly or yearly income for a specified number of years.
Increasing Cover Payout Option
With the increasing cover payout option, the sum assured of the policy increases with the completion of each year. The sum assured in the second year would be greater than that of the first year and so on up to a certain limit mentioned under the policy.
For an instance, Mr. A brought a policy with a sum assured of Rs. 10 Lacs. If case of the sudden death of a policyholder, the nominee of the policy will receive 1 lac in a lump sum manner for the first year, and in the second year nominee will receive 1.1 lac. This way the sum assured amount will increase until a certain period is mentioned in the policy copy.
Which Payout Option is better in Life Insurance?
The first thing to keep in mind is that the payout options are different for Whole Life Insurance and Term Life Insurance. We should always choose the best payout option if we want to save money on a life insurance policy. Let us understand the popular types of payout and how to select the best option:
| S.No |
Benefit |
Lump Sum Payout |
Income Payout |
Lump sum + Income |
| 1 |
Definition |
In the event of the death of the policyholder, 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 a lump sum and the remaining part is paid monthly to the nominee in the vent of the death of the insured. The percentage of the 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 that 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 installments 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 a 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 are from a 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. |
How to Receive Claim Amount?
Claiming the insurance policy is the best way to protect your family and loved ones. The process of receiving a claim payout is not an easy task. You need to go through various steps to make sure that the process goes smoothly. Here are the steps to receive a payout from the insurer
- Step 1- Claim Intimation: Claim intimation can be done online or offline. This step would be to contact Life Insurance Company by calling their customer care number. They will take all the necessary details from you and provide a claim form for you to fill out.
- Step 2- Claim Processing: Once the claim intimation is done, the next step would be submitting the claim form along with any supporting documents like medical bills, police reports, etc., to get a confirmation of payment from the insurance company.
- Step 3- Claim Decision: After the submission, the company will verify the documents and assess the claim. You would need to wait for a few days, and then you will be able to receive your claim amount in the form of a cheque or electronic transfer.
How Long Does It Take To Get a Life Insurance Payout?
When you think about life insurance, you might think of the money that you need to make sure your family has if something happens to you. The claim settlement process for Life Insurance claims varies depending on the type of policy, complexity, and type of claim being submitted. As per the Insurance Regulatory and Development Authority of India (IRDAI) the time limit for insurers should settle death claims within 30 days. But if an investigation is required in any case it takes a maximum of 120 days to settle a claim. Generally, Life insurance Companies take about 2-6 weeks to settle a claim in case of death or terminal illness, while in case of disability or partial disability claims it may take 3-6 months.
Conclusion
Life insurance is one of the most important financial decisions that you will make. The decision you make can have a major impact on your family's future. So, it is important to know the difference between the various payout options and what they mean for your beneficiaries. Compare life insurance quotes at PolicyBachat to purchase and choose the best claim payout option.