How term plans' staggered payout can be a rip-off

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Term Plan Buying a term plan online used to be child’s play. Now, given the complicated payout choices on

offer, you can go horribly wrong. Most insurance companies are offering a staggered payout option on their term plans.

Instead of a lump sum payment on death, the nominee gets 10% of the insured amount and the balance is paid in monthly instalments over the next 10-15 years. If the sum assured is Rs 1 crore, the nominee will get Rs 10 lakh on death and Rs 50,000 per month for the next 15 years. 
The arrangement is quite a rip-off. If the 90 lakh was put in a simple bank fixed deposit to earn 8%, the family would get a monthly income of Rs 60,000. That’s 20% more than what the insurance company gives out every month. Besides, the family also gets the principal back when it’s put in a bank FD.
The only glitch is that banks do not offer long-term fixed deposits of over 10 years. One may also argue that the payouts from insurance companies are tax-free under Section 10(10d). Yes, but this will make a difference only if the nominee has a high income. 
In the 30% tax slab, the post-tax income from the FD would be lower Rs at 42,000. In case the nominee is a homemaker or earns less than Rs 2 lakh a year, the post-tax returns will still be higher than what insurance companies are offering. Also, as mentioned earlier, the principal remains intact when invested in the bank FD. 
This staggered payout option is targeted primarily at families which may not be financially savvy to manage the lump-sum they receive on death of the policyholder. “This could be on account of lack of financial awareness, fear of fraudulent or misguided advice, or even lack of access to investment options,” says Deepak Mittal, MD and CEO, Edelweiss Tokio Life Insurance. 
The premium of the staggered payout option is lower than the regular lump-sum payout option, which may seem like a plus point. But the lower premium still does not justify the low returns being offered under this option. 
“Your own money is paid out to your nominee in installments. Even if the premium is lower or the total payout higher, the returns are not comparable to what the lump-sum amount could earn from other investment avenues,” says certified financial planner Pankaj Mathpal, founder, Optima Money Managers. 
Go for the staggered payout only if you fear that greedy relatives and unscrupulous financial advisors will cheat your nominee of the insurance money. Otherwise, stick to a regular term plan that offers a lump sum payment on death. Your nominee will earn more if the money is put in a simple bank FD or a post office scheme. 
Source: ET