Term insurance: Lump sum or monthly payouts?

Life insurance companies usually offer four options for payouts of the sum assured of a term insurance policy to the heirs of the deceased policyholder. The first, of course, is the lump sum payout of the entire sum assured to the heirs of the deceased. This is the simplest form of pay-out, wherein the beneficiaries are paid in full the sum assured of the policy amount in a single payout. The single payout option is suitable for those beneficiaries who are financially literate and knowledgeable enough to handle the large amount and are responsible enough to make the best use of the amount received.

In the case of instalment payouts, there are four options to choose from. These options are as follows:

1) Lump sum with fixed monthly payouts,

2) Lump sum with increasing monthly payouts,

3) Total sum assured in fixed monthly payouts,

4) Total sum assured in increasing monthly payouts.

The insured can choose any of the option for the beneficiaries taking into account the financial literacy levels of the beneficiaries as also the needs and requirements of the beneficiaries.

In lump sum with fixed monthly payouts, the beneficiaries are paid a pre-decided percentage of the sum assured as lump sum and the balance is paid in equal monthly instalments for a pre-decided period, while in the case of lump sum with increasing monthly payouts, the monthly instalments increase 10-20%  annually, which helps take care of the inflation.

As for total sum assured in monthly fixed monthly payouts, there is no lump sum payment but the entire sum assured is paid out in fixed monthly instalments for a pre-decided period, while in the case of total sum assured in increasing monthly payouts, the monthly instalments increase annually at a pre-decided rate.