Insurance: Payouts in installments prevents misuse of claims money

The payout will be higher under the instalment option, in accordance with the principle of time value of money. Since the insurer retains the customer's money for a longer period, it has to provide ad

The Insurance Regulatory and Development Authority of India (IRDAI) has come out with draft guidelines on allowing policyholders to receive claim settlement in instalments, instead of only as a lump-sum payout, as was the case until now. While staggered payouts were offered in life insurance, the regulator is now proposing to allow them in personal accident policies and benefit-based health insurance policies offered by general and health insurers as well. Once these guidelines are enforced, policyholders will be able to choose lump-sum or instalment option, or certain percentages of both.

This option will benefit policyholders in several ways. “Customers will get the flexibility to decide on a claim settlement option based on their financial situation. There is a genuine need for such flexibility today in claim settlement,” says Ashish Mehrotra, MD & CEO, Max Bupa Health Insurance. 

This option will especially benefit policyholders and their families who are not savvy in financial matters. “When a large sum of money comes to the beneficiary or his nominee at one go, there is a tendency to misuse it. For customers who are not good at money management, it is better if the payouts are spread over a period of time,” says Prasun Sikdar, MD & CEO, Cigna TTK Health Insurance. 

If the breadwinner falls prey to an accident or a critical illness, the family’s finances get affected. “Instalment payments can act as a temporary replacement for lost income till the policyholder recovers,” says Arhan Gotadke, lead partner-employee benefits, JLT Independent Insurance Brokers. Whichever option a customer selects, he need not stick to it always. Policyholders will have the flexibility to change the payout option at any point during the policy contract, and any number of times, depending on changing circumstances. 

By taking the instalment option, the beneficiary or his nominee avoids interest-rate risk. In case of a large lump-sum payout, the onus is on the family to manage the money in a way that it lasts for the next three-five years. “When the policyholder receives the lump sum, interest rates may be on the lower side. It then becomes the policyholder or his nominee’s responsibility to manage the funds in a way that they last for the next few years. Under the instalment option, the beneficiary knows how much money will come to him over a certain period of time. The onus for managing the money is not on him,” says Arvind A. Rao, Sebi-registered investment advisor and founder, Arvind Rao & Associates. 

The payout will be higher under the instalment option than under lump sum, in accordance with the principle of time value of money. “Since the insurer retains the customer’s money for a longer period, it has to provide additional benefits. How much benefit is offered will depend on the insurer,” says Sikdar. The additional benefits paid will be decided by insurers in advance as part of the product’s design, and will not depend on the interest rates prevailing at the point of claim. 

Financially savvy policyholders, who know how to invest their money and make it last, should evaluate the additional benefits being offered under the instalment option. They should also factor in the prevailing interest rates and then decide which option to go for. Non-savvy customers will be better off going for the staggered payout option. Once these products become available, customers should compare the additional benefits offered by various players under the instalment option and then make a smart choice.