Income Replacement Term Plan is a type of term insurance plan that keeps the financial future of your family secured in an unforeseen event of your demise. In an income replacement term plan, the sum assured is given to the nominee in the form of monthly instalment for a fixed period of time. Once the sum assured is exhausted, the policy terminates.
Income Replacement Term Plan: Suitable to Maintain the Monthly Cash Flow
The income replacement term plan is generally taken to replace the monthly income. For this, the benefits are offered in the form of a monthly income which is given to the nominee in periodic instalments. While a part of the insurance benefit is still offered as a lump sum by some companies, a key benefit of an income replacement term plan is that it is more tax-efficient in the hands of the nominee.
This is not the case with a term plan that fetches only a lump sum as the benefit. Mostly, the nominee invests the lump sum in a financial instrument that helps him earn interest and this interest is also subject to tax. The nominee is also given an option to commute the future income payments as and when they want and get a lump sum instead. This lump sum equals the current value of outstanding income benefit instalments.
Income Replacement Term Insurance – What are the Different Options?
Most of the insurance companies offer a variety of income replacement term plans in which the benefits are paid differently.
The most popular variant offers a variant is the one where the benefits are paid as a combination of both - lump sum and monthly income. This combination plan allows the nominee (s) to avail both – the sudden need of the lump sum amount and the long promise of financial security offered by the monthly income.
Take a look at the different options you can choose.
1. Vanilla Income Replacement Term Plan
|INR 1 Crore
|Monthly income – INR 50000 per month for 16 years and 8 months
2. Combination Plan
|INR 1 Crore
Lump-Sum of INR 50 lakh
Monthly income – INR 1 lakh for 4 years and 2 months
3. Monthly Income with Increment
|INR 1 Crore
Lump-sum payout – Total sum assured at the time of policy inception
Monthly income – 0.5% sum assured over a period of 10 years
Income Replacement Term Plan vs. Term Plan
In a lump sum term plan, the sum assured is given all at once. However, the income replacement term plan releases a fixed percentage of the sum assured every month. So, the income replacement term plan offers more salary-like assistance.
Suppose Wasim is a 35-year old man who has bought an income replacement term plan with INR 50 lakh sum assured. His policy tenure is 35 years, but he dies at an age of 52 years. Now, his wife Amina is entitled to a fixed percentage of INR 50 lakh for a fixed number of years. Once the sum assured is exhausted, the policy will terminate.
While a lump sum term plan gives a large amount of money at once, its usage depends on the nominee. If a nominee fails to invest it well, the entire amount can be squandered.
Suppose Raghav informs his wife that he has bought a term plan. And, she will get a lump sum of INR 60 lakh in case he dies. Later, his wife asks him how to handle such a large amount of money.
Which one of the mutual funds, the stock market, or the fixed deposit is a better option. Now, Raghav himself is confused.
The entire scenario is quite confusing, right?
On the other hand, the income replacement term plan offers a monthly income to the nominee. Hence, the nominee can continue to get money on a regular basis.
An income replacement term plan allows easy management of funds. A lump sum term insurance plan requires extremely efficient financial planning of the sum assured.
Who Should Opt For an Income Replacement Term Life Insurance Plan, and Why?
As the income replacement term plan is a death benefit plan, there is no maturity benefit. Hence, many people find it irrelevant to their investment goals. If you are also having your doubts, then take a look at the following section.
Who Should Opt For the Income Replacement Term Insurance Plans?
- People who are the only breadwinner in their family.
- People seeking a regular monthly cash flow even after their death.
- People whose dependents cannot manage lump-sum amounts, but can easily utilize the monthly salary.
Why Opt For Income Replacement Term Insurance Plans?
- If you have dependents such as parents, spouse, and children etc.
- If you wish to have an affordable policy for the financial security of your family.
- If you know that in case of your untimely death, there are no other means to sustain your family’s lifestyle.
- If you know that a steady monthly cash flow is the best solution after your death.
Key Points to Consider While Opting For an Income Replacement Term Plan
- Type of payout – monthly, lump sum plus monthly payouts, or a monthly payout with increasing sum assured.
- Tenure of the income replacement term insurance plan must be long enough to be relevant to an event of life or death.
- Evaluate the financial needs keeping the future needs, inflation, and major investments in mind.
- Pick riders as per your lifestyle to increase your policy cover
For more detailed information or specific queries, please reach out to us in the comments section.