The straightforward structure of a term plan-the nominee gets a sum assured on death of the policyholder during the policy term and nothing if policyholder survives the term-is not the norm but just a variant nowadays. There is a lot of customisation in the way insurance money can be given to the nominee. Now, the nominee can get: periodic income for a fixed number of years instead of a lump sum, a combination of lump sum and income, or even a periodic income that increases regularly to keep pace with your needs in the future. Then there are plans that offer payouts if the policyholder contracts a terminal illness, while some customize the policy with an inbuilt personal accident cover too. So, how do you choose from the different options available?
Lump sum or income
The choice between a lump sum and a staggered benefit option should entirely depend on your circumstances and nominees. You need to account for your debts, financial goals and your family members. So, if your spouse is financially clued in, a lump sum benefit works well, else the staggered benefit option is better. Even then, some lump sum is needed as a buffer until the family stabilises. Someone with debt can look at a higher component of lump sum benefit
The good thing is, some plans allow you to customise the death benefit to offer part lump sum and part periodic payments. You should also consider plans that increase your sum assured automatically at milestone events such as having children, without even asking for medicals. This takes care of increased insurance needs
Then there are income replacement plans. Unlike the staggered option that breaks the sum assured to pay a fixed sum for a fixed number of years, income replacement plans offer periodic income until a goal is reached. So, if it is linked to retirement then upon death of the policyholder, the beneficiary gets periodic income till the retirement age of the policyholder. If the policyholder dies closer to retirement, the sum total of pay-outs reduces. Carefully consider your liabilities and goals before buying this plan. For someone with a heavy debt, this may not be the best choice.
Terminal illness cover
Term plans have also started paying the sum assured, or a portion of it, if the policyholder contracts a terminal illness. But, according to Bondia, this is not a feature that should swing your decision. Insurers will insist on a doctor's certificate that the policyholder is terminally ill. The insurer will then carry out its own investigation. The process may not be smooth. If you have a critical illness policy, you don't really need to worry as critical illness would cover a wide range of ailments including terminal illnesses and would also act as an income supplement.
Even the policies that build in personal accident covers should be considered carefully. A stand-alone personal accident policy is not only more comprehensive, as it also takes care of temporary total disability, but is also cheaper
The choices are aplenty, but keep it simple. The market has a lot of product variants as insurers want to go beyond price differential to attract customers. But the choice really boils down to choosing between lump sum and periodic payment plans. If your claimant can't handle a lump sum payment, and you need to ensure an income stream, go for a plan that allows you to stagger a high proportion of the sum assured
Innovation in a term plan is a good thing, but to make the right decisions, approach the product from the point of view of your beneficiary.
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