The insurance payout enables family members of the deceased to sail through financial uncertainty and carry on with their lives.
We all buy life term insurance looking at the sum assured offered by the insurance company. However, should the policyholder die, the nominee should have a clear idea on how to use the claims pay-out received. This is more important if the policyholder was the sole bread earner for the family.
“While the immediate requirements may vary from beneficiary to beneficiary, the aim of insurance is to ensure financial stability. The insurance payout enables family members of the deceased to sail through financial uncertainty and carry on with their lives. If there are no loans to pay off, use the amount towards creating an emergency fund, or investing for the future. In short, utilize this amount to secure the wellbeing and financial health of your family and yourself,” ER Ashok Kumar - CEO & Co-founder at Scripbox.
Vinay Taluja, EVP and Head Cross Sell Landmark Insurance Brokers Pvt Ltd. said that in case of death claim settlement, the amount received is fully tax-exempt under section 10(10D) of Income Tax Act. "However, once you receive the money, you need to sit down and think carefully about what you are going to do with that money," he said.
Navin Chandani, CBDO - BankBazaar.com said that you should chart out your liabilities and financial goals. Decide on your priorities and then make a detailed plan. "Keep in mind your life stage and financial situation when you do this. Decide on you immediate, medium term, and long-term requirements keeping these factors in mind,” he added.
Here are few key takeaways to make a better use of your settlement amount, if required.
Repay some of the big loans
This is one of the most important things you can do. Loans usually come with high-interest rates. Depending on the type of loan, the tax savings may also be limited. So, pay off your debts so you won’t have to pay additional fees and interest. If you have balances on your credit cards, loans, and other bills, then make sure that you pay them off first.
Amar Pandit, Founder & Chief Happiness Officer at HappynessFactory.in said that the insurance claim settlement received by the beneficiary on the death of the insured person should be first used to pay off big loans. “Repayment of these loans is a good idea, as on the death of the insured, regular inflow of money into the household may be affected and payment of EMIs may stress the cash flows,” he added.
Do not stop your investment towards your financial goals
Do not stop your existing investments which are already running towards your long-term financial goals. Also, once you have cleared your debts and secured your income, your next step would be to save. Chart out your other long-term goals and invest a part of your settlement towards these goals.
“The next thing the beneficiary must prioritize is planning for major financial goals like Education and Marriage Goals of Children. Once these goals are provided for, one should then build a retirement corpus to provide for regular income needs of the family,” said Amar Pandit.
“Reinvesting by re-allocating some of your money towards your ongoing financial goals would help you make up for any shortfalls, and help you realise those goals faster. Investing in mutual funds can give you inflation-proof returns. Choose the right instrument—liquid funds, equity, balanced funds—depending on your risk appetite and investment window,” said Chandani.
Take monthly payout as a source of regular income
While receiving a lump-sum during claim settlement, you may invest your money in such way that starts receiving regular monthly payouts. Some term insurance plans also come with this facility that instead of getting a lump-sum amount, you get monthly payout so as to maintain your financial health in the same manner as it was earlier.
Chandani said that claim settlement implies some kind of upheaval in life and the in such a situation, the primary requirement is to have a regular source of income that can help you tide over difficult situations. “Take your time to scope out different investment options and invest in something that can provide you returns. There are several immediate annuity plans that you can consider,” he said.
Take a new insurance policyCasualty can happen anytime and it may happen in future too which you will never get to know. Therefore, taking a new insurance policy can further secure your goals and liabilities. “If the beneficiary is an earning member, then he/she should also take a term insurance policy to secure the future of his/her dependents,” said Amar Pandit.