Spreading the payouts :: Business Line

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Protection plans launched so far in the country have focused on covering immediate liabilities by paying a lumpsum to the family, and not on how this can be used by the policyholder’s family.

But recently, certain insurers have attempted to address this problem by offering protection products with staggered payouts at monthly or annual frequency over a few years.

In small amounts

Let’s explain staggered payouts with an example. Say, Mr Verma, a 35-year-old with an annual income of ₹8 lakh, has taken a pure protection plan for 15 years. Under the plan, his family will receive ₹1 crore in case of his demise. If this happens, Mr Verma’s family will receive a huge inflow compared to his annual income.

Given the trauma the family is going through, this will add to the burden due to the immediate financial responsibility of managing this large amount, so that it generates enough return to support the family’s financial goals and daily expenses.

Families may be misled in such situations, by financial advisors, opportunistic relatives or friends.

On the other hand, say Mr Verma buys a pure protection plan of the same value which offers 10 per cent of the cover value — that is, ₹10 lakh — paid upfront for immediate consumption. Thereafter, the policy will give staggered payouts of 0.5 per cent of the cover value — ₹50,000 a month for the next 15 years. Such a system will make it far easier for the family to meet expenses and goals, with enough time to carefully chart out an investment plan.

The lumpsum, while it can be invested, may not necessarily provide such regular income, more so since staggered payments commence immediately.

Benefits

The lumpsum and monthly income received from the insurance company will be tax-free.

What’s more, the premium amount that has to be paid will be lower than the standard policies that pay lumpsum benefits.

There are also variations that insurers are coming up with. For instance, the policyholder can choose for an increasing payout option where the monthly payout increases by 5-10 per cent each year to deal with inflation.

The writer is Sr EVP – Marketing, Product, Digital and Ecommerce, HDFC Life