Optimizing claim settlement options in term life insurance plans
As time passes, term plans have started losing their simplicity. Now it comes in various versions where by insured may ask for a lump sum benefit or a distributed benefit for his nominees.
Term insurance is recommended over ULIP or endowment insurance plan because term plans offer low cost, simple structure and pure protection cover with no investments linked structure. Term insurance used to offer a clear view to the insured and family that if something happens to the insured, this is the amount that the family will get.
However as time passes, term plans have started losing their simplicity. Now it comes in various versions where by insured may ask for a lump sum benefit or a distributed benefit for his nominees.
Lump sum benefit is simple to understand, but a distributed benefit or as insurance companies call it as income benefit, is something which might confuse. To increase the confusion the income benefit feature is not same among different insurers.
This is how it works. On insured’s death some percentage of total sum assured will be paid to nominees in lump sum and the balance will be paid out in different years till the sum assured gets over. Some insurers extend the period to pay off the balance sum assured in order to increase the total benefit payable. And in some cases insurer keeps increasing the annual payments with a fixed percentage every year.
For different benefit plans, it’s natural to have different premium plans too. No points for guessing that the premium would be lower in case of income benefit plans, as insured will not pay you the total money in lump sum and will manage the money to pay you timely annual payments.
On the face of it or a decent sales pitch tells you that it is wise to get into income benefit plans since it may be difficult for the family to manage money if received in lump sum and income payments will take care of their regular expenses. Other argument in favor of income plan could be that these versions of term plans are cost effective. Since for many, cost is one of the major parameters while selecting a term plan so the cost effective version do attract the eyeballs.
Income benefit plans does suit the emotions as it is expected to secure the family’s regular income requirement without exposing them to hardships of money management. But financially speaking, this seems to be an easy solution as difficult thing is to make family understand the importance of money and how to use it wisely.
Sometimes the insured is wary of a situation where in his family is being taken for a ride by some mis-sellers. Hence the insured opts for income benefit option. But they tend to forget that the crooks can walk in when they see a family with regular income. Insurance agent or insurer’s employees helping in getting the claim can sell unsuitable products. The bank employee helping in maintaining the bank account can again pitch for some products. We all have some friends, acquaintances who are investment product distributors, they will also try to sell their own products with a pitch to further secure the future of the family after you.
The intention is not to turn you away from income benefit plans. I just want you to understand that no plan can make your family secure if they do not know, how to make better use of money.
So the most important point is to involve the family members in your financial decision making. There is no point of buying insurances if your families for whose future you have done that are not aware of your actions. If you have a financial planner by your side then make sure that every family member should know about him and he should be trustworthy enough to guide your family properly even in your absence.
Always buy insurance policies after considering all your future responsibilities and current obligations. Your insurance cover should be enough to take care of your kid’s education, marriage, and family’s current and future expenses to keep your spouse independent, your loans and other obligations. This way your family should be aware of the fact as to what amount has been allocated to which goal.
Many people feels that Rs 1 crore cover should be enough for them , as Rs 1 crore itself looks like a decent amount in itself, but will that be decent enough to cover all your responsibilities that needs to be seen.
So when you have right calculations for the right insurance cover at place, you would know which goal requires lump sum money and which requires regular income. And
you can divide your sum assured in suitable policies. You should plan your insurance cover in such a way that the management of claim proceeds should not be headache to the family, and even a simple product like bank fixed product should be helpful enough to take care of their requirements.
Term plans with income benefit does not suit financially too, as it results into a big time interest loss to the family, in comparison to money managed properly.
However still if you have doubts on the money management ability of the family then it might be worth to bear the cost of interest loss and you can take a combination of decent lump sum benefit with income benefit policy.
The choice should depend on your requirements and how you want the things to be managed in future, rather than how the product works and wants you to fit in to its features.
Manikaran is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.