Claim settlement options in term life insurance policies

There are a number of options for settlement of claims on the death of a person insured under a term life insurance policy. Looking at the options, the prospective policy buyer may be in a quandary while choosing between the options and may select an option which may not be suitable for the nominees after the death of the insured. So let us look at the claim settlement options available and how to go about selecting the right option.

Lump sum payment option: By far the most popular option, lump sum claim settlement option entails payment of the entire sum assured to the nominee of the expired policyholder at one go by the insurance company. The nominee is at liberty to utilise the amount as per his/her wish. The nominee can utilise the funds received to prepay a large loan such as a home loan or business loan of the policyholder or his/her own loan. However, if the nominee squanders away the money or misuses the funds, the nominee and his/her family would suffer. If there are multiple nominees, the policyholder should clearly mention the proportion in which the amount has to be allocated to each of the nominees to avoid conflict between them.

Regular income option: Under the regular income option, the insurance company pays the sum assured to the nominees of the insured in equal monthly instalments over a pre-determined period of time.  Since no lump sum payment is made by the insurer under this option, the nominees would not be able to prepay any large loan in lump sum as the insurance amount is disbursed in monthly instalments.

Lump sum and regular income option: This option seeks to combine the benefits of the above two options so that the nominee gets the benefits of lump sum payment and regular monthly income. The insurance company pays part of the sum assured in lump sum to the nominee, while the balance amount is paid in instalments over the period stipulated in the policy document. There is another option in this too. The policyholder can opt for increasing the regular monthly payouts to the nominees in the later years of the stipulated period. The regular pay-outs can also be linked to the attainment of the age of 21, if the nominee is a child.