Claim paid as instalment can help future expenses

Any emergency situation is always unexpected. This is exceptionally true for critical disorders or injuries sustained during an accident. However, many people exercise prudence and, therefore, buy critical illness plans and personal accident policies. Investing in these insurance plans ensure a substantial amount of money in lump sum to policyholders for treatment. This means that policyholders need not dig into their savings to pay off their medical bills.

In case of critical illness plans or accident plans policyholders, receive the amount in lump sum. They can either undergo treatment or secure the amount for their loved ones. Since the healing process takes a lot of time, most policyholders do not have a regular income option after the treatment starts. Keeping this in mind, the Insurance Regulatory Development Authority of India (Irdai) has proposed policyholders to accept claims in instalments under the personal accident and benefit based insurance products including critical illness plans.

The draft guidelines says, "A combination of both the options, that is, a percentage of the sum assured as a lump-sum payment at the time of claim and the balance sum insured in instalments for a definite period of not exceeding the time limits may also be offered as a part of product design."

If implemented, policyholders choose their payout mode between lump sum, instalments or both in parts depending on their needs.

How will this move help?

This proposal if accepted, will change the course of the insurance sector. Aalok Bhan, director and chief marketing officer, Max Life Insurance Company Limited explained, "This feature has been in existence in the life insurance industry. Life insurance products by nature offer large quantum of sum assured and, hence, spending the claim money wisely at times depends on the financial wisdom of the nominee. This feature benefits the nominee in case where he/she is not in a position to decide on making the best use of the lump sum amount, as opposed to getting a periodic instalment. This way this feature is an automatic income replacement, for the income lost due to the accident or the health event. Having said that, on this feature our experience has been that customers/nominees still prefer to avail their claim amounts in lump sum. The customer stands to gain from this feature due to the flexibility explained above. The insurer will be neutral since the instalment amount would be based on an interest rate which will be mentioned up front, and the insurer will have no subsequent control over it." This means that if the policyholders choose to receive the claim amount in instalments, nominees will avail a regular inflow of income over a predetermined period also called the claim payment period.

Explaining how the new payout options similar to term insurance plans would benefit policyholders, Puneet Sahni, head – product development, SBI General Insurance said, "The proposal to allow payment of claim amount in instalments shall be beneficial for the insured as they can plan the expenditure as per their life needs instead of one-shot payment. In such situations where the claim is payable, the insured will always have an immediate need and future needs to fulfil. Such a proposal will allow the insured to plan the future expenditure."

Claim payouts could be higher in instalment option

Under the instalment option, the insurance company would be retaining a portion of the claim payouts for longer periods. However, going by the concept of Time Value of Money, policyholders can earn interest on the sum if they receive it in lump sum. To ensure that policyholders avail the full value of the claim settlement in instalment mode, insurers could consider the division of the claim instalments in accordance with the prevailing market interest rates and additional investment potential of the funds. Shanai Ghosh, chief marketing, strategy and commercial, Edelweiss General Insurance said, "In India, financial institutions decide the rate of interest. Hence, it will be the insurance company that will determine the rate of interest as it would take into account many factors including probable market conditions, prevailing interest rates, etc."

Policyholders may choose between the instalment frequency options including monthly, half-yearly, quarterly, bi-annually or yearly depending on their needs and budgetary requirements. The insurers, in turn, will offer the periodicity of the instalments depending on the insurance product. However, insurers cannot include the instalment claim settlement as the default option.

Limited claim payment period

However, benefits of the payout instalments will be limited to the claim payment period of five years only, subject to the nature of the insurance policy. This means that the claim amount would be settled in instalments over a span of five years from the date of making the claim. Sahni added, "Currently the total claim payout is made at one shot. From the insurer's standpoint, the entire liability is proposed to be earmarked separately. Only the disbursal of the same is proposed over a maximum of five years."

Similar premium rates

Greater benefits need not be synonymous with increased charges. Irdai has warned insurance companies against charging different premium rates for both the lump sum and instalment payout options. This is because premium rates are associated with the extent and quantum of risk being covered under the insurance plan. The settlement option does not carry any insurance risk and, hence has no effect on the premium rates.

Flexibility allowed for policyholders

Benefits for the policyholder are not limited to the claim payout modes only. In fact, policyholders may choose between the options at the time of policy inception, during policy renewal or at any point during the policy term. Policyholders may also request for a change in the claim payout mode at the time of making the claim. Also, post the inception of the claim settlement payments being received in instalments, the policyholder may choose to pull out from the option already given and seek the remaining instalment amounts in a lump sum.

ADVANTAGE POLICYHOLDERS

• The option to choose claim payout as either lump sum payment or instalment mode is beneficial for the nominee in case where he/she is not in a position to decide on making the best use of the lump sum amount, as opposed to getting a periodic payment. This works as an automatic income replacement, for the income lost due to the accident or the health event
   
• The insured can plan the expenditure as per their life needs instead of one-shot payment. In such situations where the claim is payable, the insured will always have an immediate need and future needs to fulfil. Such a proposal will allow the insured to plan the future expenditure.