Staggered payout options
If you feel that your nominee may not be able to handle a huge corpus on his own or may be misled by others, you could consider the staggered payout options offered by most term insurance plans. However, financial planners are sceptical about these. “I don’t recommend staggered payout plans because the return—based on IRR—is very low for these products,” says Sharad C. Mohan, Founder & CEO, Calibre Investments. If the return generated on the corpus received is very low, it amounts to a loss for the recipients. So, the loss in interest component needs to be factored in while deciding whether to go for staggered payout plans or not.
Since insurance companies get to keep the corpus for a longer period under the staggered payout option, the premiums are low for these plans. But low premiums should not be the deciding factor. Let us consider the example of Max Life Insurance – the simplest option available in the table below. The same premium of Rs 4,811 can buy a cover of Rs 28.12 lakh with immediate payout from the same insurer. If your nominee invests Rs 28.12 lakh and earns a post-tax return of 5.25% per annum (given in table as IRR), she can withdraw a monthly sum of Rs 30,000 for the next 10 years. If the returns earned are higher than 5.25%, she can withdraw a higher amount every month.
Should you settle for low returns? Yes, if you think your nominees will not be able to manage the corpus themselves or with the help of an adviser. “Though staggered payout plans are suboptimal, there is some merit in using it because you can protect your nominees from potential leeches,” says Deepesh Raghaw, Founder, Personal Finance Plan.
Decide the time frame
Once you decide to go with a staggered payout plan, detrmine how long you want your nominees to get regular income for. This depends on the individual’s life stage. For example, you may prefer a long duration if the nominee is young. This decision is also important for selecting the insurance provider because these are not standard plans. Since insurance companies offer several variants, you should go with the insurance company that offers your duration requirement.
Choose payout option based on family needs
The one-time payout in the staggered option takes care of the family’s immediate requirements.
Don’t ignore immediate needs
The family may have several immediate requirements, some of them related to the demise of the policyholder like hospitalisation expenses that need to be paid off. Then there may be several approaching goals.
Paying off liabilities like outstanding home loan can be another priority. Several plans offer options that are a mix of immediate and staggered payments (see table). Some money is given lump sum on death and the remaining as monthly payments. You can also take two separate plans. “Use the lump sum money to pay off debt and also to invest for immediate goals and use the staggered payouts for meeting regular expenses,” says Raghaw.
Alternatives before buyers
If you are not comfortable with the low returns offered by staggered payout plans, you need to think of viable alternatives. First (and the best) step is to work at making your family members more financially aware. “You need to involve all family members, especially ladies, in family finance and teach them how to manage the corpus,” says Shilpa Wagh, Sebi -registered investment adviser.
The second option is to designate a person who can guide the nominees. This can be friend, family member or financial adviser. The person should be someone who has the ability to manage finances and also someone you trust. If you are going for an adviser, find one as early as possible to allow him to understand the family’s needs.
The third option is to leave detailed instructions about where the money should be invested. “It is better you write down how you want your money to be used in your absence” says Raghaw. It might entail putting some portion that pertains to a child’s education in FDs, some in options like SCSS and PMVVY to take care of the regular needs of parents or buying annuity plans.