I am buying a term plan and the insurance company is offering three pay-out options. In the first option, if something happens to me, the insurance company will pay the entire sum assured as a lump sum to the nominee. In the second option, they will be paying some amount as a monthly income for 10 years over and above the sum assured. And in the third plan, they are saying that the monthly income will be increased every year by 10 per cent. Which option should I choose?
All these options are quite self-explanatory. In the first one, the entire sum assured will be paid in a lump sum to the nominee. In the second option, the nominee will get a fixed sum immediately followed by some fixed monthly income for the next 10-15 years. And in the third option, the monthly income will be revised by a certain percentage every year. So, it will guarantee inflation-adjusted income for your nominee for the specified years.
You can choose the pay-out option based on your nominee's ability to manage the situation. Just think in the sense that if you are not around and the nominee gets a huge amount of say Rs 2 crore in a lump sum, now will he or she be able to invest it in a manner that a regular inflation-adjusted income can be derived? Will he or she have the required discipline? What are the chances of him or her falling prey to something that is too good to be true and actually may result in money getting disappeared? Even if you devise a plan for a regular inflation-adjusted income, will he/she be able to execute it nicely in your absence?
The main purpose of buying a term insurance is to make sure that your dependants are nicely taken care of in your absence. And any of these three plans can be taken for that purpose, depending on your nominee's ability to manage the situation.