Your nominee can earn more if the money is put in a simple bank FD

Most insurance companies are offering a staggered pay out 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 `1 crore, the nominee will get `10 lakh on death and `50,000 per month for the next 15 years.

If that sounds cool, just consider these numbers. If the `90 lakh was put in a simple bank fixed deposit to earn 8%, the family would get a monthly income of `60,000.That's 20% more than what the insurance company gives out every month. Besides, the principal remains intact for the family to use for any other purpose.

One may argue that the pay outs 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 at `42,000. In case the nominee is a homemaker or earns less than `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 pay out option is targeted primarily at families which may not be financially savvy to manage the lump sum they receive on the death of the policyholder. This is important in a country like India where financial literacy is low.

The premium of the staggered pay out option is lower than the regular lump sum pay out 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 instalments. Even if the premium is lower or the total pay out higher, the returns are not comparable to what the lump sum amount could earn from other investment avenues.

Go for the staggered pay out only if you fear that greedy relatives and unscrupulous financial advisers 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.