What is the Payout Period for Life Insurance Policies

Like any other financial product, life insurance plans also have various terms and conditions when it comes to their payouts. This is especially true for income plans, endowment plans, and annuity plans, where you receive regular payouts for a long duration of time. If you are planning to invest in an endowment insurance plan, then you need to be aware of your plan’s ‘payout period’.

In the simplest of terms, the payout period of an insurance plan is the time during which you receive the plan’s maturity or death benefits. The payout period can vary from plan to plan. If you want to learn more, below is a short guide that delves into the importance of your life insurance payout period.

What are the Types of Payout Periods?

There are two types of payout options in every savings insurance plan:

Survival Benefits- Survival benefits are paid out in the form of regular income during the policy term itself. This means that your payout period will begin when you get your first income payment and will continue until the very last payment has been credited to your account. The duration and frequency of survival benefit payouts are decided before the inception of your policy.

Maturity Benefits- A maturity benefit is a single lumpsum payment made at the very end of your policy. Some plans may have a short payout waiting period after your policy term ends. However, this waiting period is generally not longer than 30 days.

What Types of Life Insurance Plans Have a Payout Period?

Technically, all insurance plans, even basic term life insurance plans with no maturity benefits, have a short payout period. For example, if you pass away and your nominees make a claim on your term plan, they will not get the death benefit instantly. Even term plans have a 30–60-day payout period before the death claim is settled. And this payout period can further extend to 90 days if the insurance company decides to investigate the claim.

However, in the context of insurance plans that provide returns, your payout period specifically refers to the time during which you will receive your income. Plans that have a payout period include:

Guaranteed Income Plans: Savings insurance plans where your income is completely guaranteed. Income payouts for such plans is generally start after you have finished all your premium payments.

Participating Insurance Plans: Plans where you invest your premiums into the insurance company itself. Such plans might offer a ‘cash bonus’ element. Cash bonus payments can start from the 2nd policy year itself, depending on the terms of your policy. The value of your cash bonus will completely depend on your insurance provider’s profit declaration for a given financial year.

Unit-Linked Insurance Plans (ULIPs): In ULIPs, your premiums are invested into market-linked funds, and your returns will vary based on the market performance. Certain ULIPs may also have a ‘systematic withdrawal’ benefit. If you opt into this benefit, you will receive a part of your fund value as an income benefit. The income you receive from a systematic withdrawal plan is dependent on the performance of your funds.

Term Plans with Staggered Death Benefit: As stated above, even pure life cover plans like term insurance have a short payout period for death benefit payment. However, some term plans may also include an option for staggered death benefit. If you choose this option, your nominees will not receive the death benefit in one single lumpsum. Instead, they will receive their claim amount via regular instalments that are paid out over time.

Why Choose a Plan with Long Payout Periods?

Here’s a question that you might have thought of:
Why choose an income plan with a long payout period over a plan that offers an upfront lumpsum payout?

Both lumpsum and income payouts have their own list of pros and cons. Income plans are best for those who want a source of passive income to supplement their current earnings. Moreover, your income payouts are taxed individually, and generally the taxable about is directly removed via TDS (tax deduction at source). On the other hand, lumpsum amounts are taxed all at once, and the taxable amount may also be greater due to the larger sum involved.

Another thing to consider is that a lumpsum amount can run out unexpectedly due to financial mismanagement. But with staggered income, there is no chance of losing your entire corpus, as your returns will only be given out in parts. This benefit is especially useful if you are looking for a retirement plan. An income plan will ensure that you are financially secure during the golden years of your life. In fact, income plans are ideal for those who want a pension stream post-retirement.

Choose a Payout Period That Suits Your Needs

Your payout duration needs to match your personal financial goals. Need a passive income source post-retirement? Then pick a plan with a life-long income option that financially covers you till you pass away. Or do you need income to supplement your current salary so that you can fulfil your goals? Then pick a payout period that complements the financial timeline you have set for yourself. Your payout period is completely dependent on your personal requirements, so there is no one plan that can fit everyone’s needs.

Another thing to consider while buying an income plan is its flexibility. A flexible payout period can help you to mould your plan according to your needs. Edelweiss Life- Flexi-Savings Plan is an income plan that has three plan options, each catering to different financial requirements. Go through the plan options to find a payout period that can assist you in completing your financial goals!

 

Aastha Mestry - Portfolio Manager 

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.