As society’s collective standard of living has risen, so has the cost of maintaining this lifestyle. Added to this are the ever-increasing costs of healthcare. These are uncertain times we are currently living in. The coronavirus pandemic that has taken the country by storm has only added to the sense of uncertainty everyone is currently facing.
By availing some form of financial protection, individuals can have protection when needed. Therefore, savings insurance plans are profitable as they aim to provide a financial safety net to insured individuals.
Why Opt for Savings Plans?
Savings insurance plans like the Tata AIA savings plan are beneficial life insurance products that combine the benefits of savings and life cover in a single policy. Those interested in this insurance choose a contract period and pay a premium. This premium will vary and will be determined by the insured amount desired by the insured person and other factors.
Before purchasing a savings plan in India, one must first look at the benefits each plan puts forward. This can be a challenge when purchasing a first savings policy as there exist different kinds of payouts that one needs to be aware of. There are two major types of payouts: death benefits and maturity benefits.
What is a Payout in Savings Plans?
A payout is a death benefit paid to beneficiaries or dependents of a savings investment plan when the insured dies. When taking out the policy, the insured person chooses how the death benefit is to be paid out. Their payment choices are based on their family’s financial liabilities, financial knowledge, and future ambitions.
- Death benefit payouts: Life insurance is valid for a certain period. This is known as the contract term. Now, if the policyholder dies during the policy term, the insurer pays out the sum insured under the policy to the policyholder’s nominee. This sum is known as the death benefit because it is paid upon the policyholder’s death.
And it’s a predetermined amount known to the policyholder when the plan is purchased. All life insurance policies offer death benefits. This is the main benefit of any life insurance policy.
By paying death benefits to the policyholder’s family, life insurance ensures that the surviving family members are financially secure even after losing the only or primary breadwinner in the family.
- Maturity benefit payouts: One must be thinking about what will happen if a policyholder completely survives the term of the contract. In such a case, the long-term saving plan is matured. And this is where most life insurance plans pay maturity benefits to the policyholder.
The term payout varies from plan to plan. It can be quantified upfront for some plans, while for others, it can be a variable amount determined at the end of the contract term. The amount due generally includes any returns from the investment made by the policyholder and bonus payments. However, people should note that not every life insurance policies offer maturity benefits.
What are the Payout Options Available?
Below are some Payout options available under the long-term saving plan:
- One-time lump sum payment: This is the most sought-after option as it includes receiving death benefits right away. If the insured dies by an unfortunate incident, an insurance company pays a lump sum equal to the sum insured to the policyholder’s nominee or beneficiary.
In such a case, the sum insured will be paid in a single payment to the insured or their nominees as death or retirement benefits. This payment also involves loyalty and bonus rewards.
Single payments make sure that the policyholder or their nominee receives a notable amount in a single transaction which allows them to invest in other instruments or use it to cover some important expenses like college fees, debt payment, down payments, or home loans. If the insured elects this type of payment, their nominees will receive the total amount in a single payment that’s owed by the insurance company.
- Lump sum payment and fixed payments on monthly basis: In such a case, the beneficiary receives a part of the sum insured in the form of a one-off capital payment.
In addition, an insurance company is required to make payments on a monthly basis for the next few years or as indicated by the insured person when first purchasing the policy. This particular kind of payment is advantageous as the beneficiaries can use the monthly additional payment in order to cover their daily living expenses.
- One-time lump sum payment (addition to increasing monthly payouts): Nominees of this particular type of term life insurance payout are entitled to a one-time capital payment that’s equal to the total sum insured at the time of the insured person’s death.
Furthermore, they receive annually increasing amounts of money for a certain period of time, which the insured person determines when buying this insurance. Such payouts are subject to the terms of the policy.
- Payments made on a regular basis: In cases of regular life insurance payments, part of the benefit is paid out in installments or annuities. The life insurance company pays for this over a fixed time period. As a consequence, the policyholder or the nominees (if the policyholder dies) receive a steady income stream that can be used to pay out periodic expenses like rent, utility bills, EMI payments, or rent.
Financial planners believe that if an individual has a good understanding of finance and is confident that they will be able to efficiently manage the lump sum payments, they should definitely choose a lump sum payment option instead of a staggered payout option.