Lump-sum Plus Monthly Benefits: The New Attraction of Term Insurance

July 21, 2021

A pure term insurance plan is considered as the best protection plan at the cheapest premium. Because of its simple structure,comparison of such plans can easily be performed using insurance comparison engines such as – and others. A plain vanilla plan pays a lump-sum benefit and terminates thereafter in case the life insured dies within the policy term but does not pay anything if the policyholder survives the policy term. The comparison of such plans can be done on the basis of premiums only.

The new age term insurance plan, on the other hand, is designed to offer periodic cash inflows over and above the lump-sum payout that makes comparison more complex. Some life insurers have already launched such staggered plans that offer benefits into parts a lump sum amount immediately after the demise of the life insured in addition to regular monthly payments for a certain years. Some of them even offer to increase monthly income by a certain percentage in a bid to beat inflation.

Experts believe that in some cases the nominee under the policy may not really be equipped to make effective use of a big amount received as the death benefit. In that sense, term plan with staggered benefits that caters to immediate liabilities with the lump sum amount and help ensure living expenses and future goals with regular income, is a good idea.

But the big questions are – how to compare these plans? What should be the parameters for a suitable comparison?

Through an example below, I’ll try to make you understand how comparison of such plans can be performed-

Suppose, there are two plans- Plan (A), which offers to pay your nominee Rs. 100 every year for 10 year, and can be bought for Rs. 100; Plan (B), at the same premium Rs. 75 every year for 15 years. The total payout under the Plan (A) is Rs. 1,000 while the Plan (B) would pay Rs. 1,125. Most people may prefer to go with the second plan that pays a little higher amount. But they forgot to factor in inflation. Despite a higher payout the Plan (B) offers, it may not really be a better deal if you factor in inflation and time value of money.

Net Present Value (NPV) is a factor that needs to be implemented while comparing such plans. Assuming the current inflation rate 6 per cent, NPV of all future cash flows from Plan (A) comes to Rs.736 and Rs.728 from Plan (B). It means Plan (A) is better option.

Here are some of online term insurance plans that ensure a regular income with a lump sum amount:

Lump-Sum + Monthly Income Plans

Plan Name Premium (in INR) Lump sum payout (in INR Lac) Monthly payout (in INR) NPV (in INR Lac)
Edelweiss Tokio My Life + Plan 7,253 43.47 43,470(for 10 yrs, 10 months) 79.31
Reliance Life Online Income Protect Plan 7,295 45.45 22,720 (for 20 yrs.) 72.63
PNB Met Life Mera Term Plan 7,455 41.80 48,490 (for 10 yrs) 89.84
HDFC Life Click2Protect Plus-Income Option Plan 8,641 10.00 50,000 (for 15 yrs) 62.32
Max Life OTP Plus Plan 8,704 67.56 27,020 (for 10 yrs) 89.84

Lump-Sum + Increasing Monthly Income Plans

Plan Name Premium (in INR) Lump sum payout (in INR Lac) Monthly payout (in INR) NPV (in INR Lac)
PNB Met Life Mera Term Plan 7,323 40.95 31,940 (10 [email protected]% increase a year 79.45
Max Life Term Plan-Increasing Income 8,200 58.96 23,580 (10 [email protected]% increase a year 85.88
HDFC Life Click2Protect-Income Plus Option-ll 9,312 53.47 26,730 (10 [email protected]% increase a year 83.99

Here we learnt that inflation eats out the value of cash flow over time. NPV helps us determine the current value of the future inflows. So, NPV is the method that can be applied to compare premiums of the plans that offer periodic cash-flows.

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