Income Replacement Term Plan

term insurance
Protect your loved ones against death, disability and Illness
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Income Replacement Term Insurance Plan

Life is unpredictable. Any untimely event can turn a happy life into a nightmare, especially an untimely death of a loved one can tighten the financial situation leaving the entire family in a financial emergency. Therefore, being ready to face the uncertainties of life is the wisest decision. An income replacement term insurance plan is one such tool that will ensure the financial security of your loved ones in your absence. In an unforeseen event like death or disability, you shall not be in a position to help your loved ones to sail through tough times but with an income replacement, term plan can surely help to take that responsibility by helping your loved ones sail through financially tough times. An income replacement term insurance plan will help you to plan for the financial future of your loved ones in your absence and give you peace of mind. Read on to understand in detail about the Income Replacement Term Insurance Plan.

What is Income Replacement Term Insurance?

Income Replacement Term Insurance Plan as the name suggests is an insurance policy that promises to pay the nominee every month a certain percentage of the sum insured for a predetermined time. This percentage is pre-determined by the insured at the time of purchasing the insurance cover. Income Replacement Term Insurance plan is a pure term plan that offers only benefit in the event of death and disability and no Maturity benefit is available under this plan. 

In simple terms, an income replacement term insurance plan is activated in the event of the death of an insured during the policy tenure. When the life assured passes away the nominee or the beneficiary appointed by the insured to receive a monthly cash flow as income. While some plans are designed to offer income replacement to the nominee in case the insured is permanently disabled due to a medical condition or accident.

For example, Mr A purchases an income replacement term insurance plan at the age of 32 having a policy tenure of 35 years and sum assured INR 1 Crore. If Mr A dies at the age of 50 his Nominee Mrs A shall receive the death benefit of INR 1 Crore in monthly instalments depending upon the percentage pre-determined by the life assured at the time of purchasing the policy. This monthly payment of death benefit shall continue for a fixed number of years and once the entire death benefit is paid, the policy terminates and the insurance company shall make no further payments to the nominee.

Additionally, the terms of repayment of the death benefit to the nominee can be pre-determined and customised by the life assured at the time of policy purchase i.e. the sum assured monthly payment amount, tenure of payment, etc.  

Key Features of Income Replacement Term Insurance Plan 

Following are the key highlights of buying an income replacement term insurance plan

  • One of the biggest features of the plan is to offer financial security to the loved ones in the event of the death or disability of the insured
  • The product is designed to provide monthly cash inflow to the family to cover for the daily expenses thus in this manner the insured can financially plan the expenses even in his/her absence or disability
  • This plan is best suited for a family who has limited exposure to handling lump sum money
  • With an income replacement term insurance plan, the insured can plan beforehand the financial security of the dependents. 

Thus, with the above features of the plan, we can say an income replacement term insurance plan is very suitable for securing the financial future of your loved ones as the insured can plan to cover all the expenses beforehand for the family.

Benefits of Income Replacement Term Insurance 

Benefits of an income replacement term insurance plan are numerous. Here is a list of benefits of how an income replacement term insurance plan can benefit you and your family.

  • Stress-free financial planning: Income replacement term insurance plan is a second-generation term insurance plan with additional benefits. Under a regular term insurance plan, the nominee or beneficiary was eligible to receive a lump sum amount as death benefit and the insurance plan would terminate but what if the dependents are not able to manage the lump sum money? A wrong decision can derail the entire financial future of the grieving family as investing lump sum money in a safe manner that would ensure monthly inflow is the biggest challenge. Therefore, to overcome this difficult situation, the income replacement term insurance policy is used wherein the insured can plan the entire expenses or cash flow of the family in his absence. 
  • Take care of Household budget: Every family spends certain cash for running a household. In the event of the death of the earning member, the family expenses will come to a halt as the income is stopped abruptly. However, needing a constant cash flow to maintain a regular lifestyle is mandatory. So, with an income replacement term insurance plan in place, the household budget is not abrupt as the regular income will ensure that their daily activities and current lifestyle are not hampered. 
  • Inflation-adjusted cash inflow: with income replacement term insurance plan the death benefit can be availed by the family with increasing income i.e. that the cash inflow will increase gradually. This increasing income option is beneficial to overcome the ever-increasing cost i.e. inflation. Thus, an increasing income will give a chance to maintain their lifestyle irrespective of rising inflation. 
  • Tax Exemption: The premium paid for income replacement term insurance is eligible for tax exemption under section 80C of the income tax act, 1961.

What is Covered? 

Income replacement term insurance plan is designed to cover the risk related to the death of the insured. Therefore, death is covered by an income replacement term insurance plan. However, there are certain specific kinds of deaths that are covered under the plan while some are not covered. Here is a list of types of death that are covered under an income replacement term insurance plan.

  • Natural Death: A death caused due to natural reasons like old age is covered under this plan.
  • Accidental Death: Death caused due to an accident is covered as it a sudden and involuntary event caused due to external force like a vehicle accident, fire, accident in the factory, drowning in a river, earthquake, electric shock, etc.
  • Death due to a pre-existing medical condition: If the insured had declared about the pre-existing medical condition and if the death is caused due to such pre-existing medical condition it will be covered. For example- people suffering from blood pressure have higher chances of death due to heart-related diseases. So, if the insured had already declared pre-existing condition and the reason for death is the result of pre-existing medical condition then such deaths are covered under income replacement term insurance plan.
  • Permanent Disability: Any permanent disability occurring due to accident or pre-existing medical condition.

What is Not Covered? 

There is a list of deaths that are not covered under the income replacement term insurance. These deaths or situations are mentioned under exclusions in the policy documents. The following is the list of common types of deaths that are not covered under an income replacement term insurance plan:

  • Death caused due to self-inflicted injuries
  • Death due to suicide within the first year of the policy
  • Death due to complications in maternity
  • Death due to HIV/AIDS
  • Death due to accident caused by intoxication
  • Death caused by participating in hazardous activities like racing, adventure sport, etc.
  • Death caused due to not disclosure of habits like smoking, alcohol etc. 
  • Death is the insured was involved in a criminal activity

How Does Income Replacement Term Insurance Plan Work?

An income replacement term insurance policy is designed to take care of the financial security of your loved ones on a monthly basis. The insurance companies have come up with various insurance product term insurance is a pure insurance plan that offers lump-sum death benefit in the event of the death of the policyholder, furthermore, an income replacement term insurance plan is a second-generation variant of the basic term plan. This plan aims to rescue the insured from the feeling of financial insecurity that you think they might face in your absence or in the event of your disability. 

Many-a-times the insured is of the feeling that the dependents or the nominee may not be able to handle a lump sum payout received by them in the event of the death or disability of the insured. So, buying an income replacement plan will help as it will ensure a fraction payout of the death benefit each month to the nominee. In simple words, an income replacement term insurance plan breaks the entire sum assured amount in monthly instalments and pays it to the nominee as monthly compensation. 

The biggest advantage of the income replacement term insurance plan is to sole earners of the family and where the dependents are not financially knowledgeable to handle lump sum money or make right decisions related to sound investments options.

Claim Process of Income Replacement Term Insurance Plan

Here are some basic steps that a nominee needs to take to avail the benefit of an income replacement term insurance plan:

In the event of the death of the insured:

  • Submit duly filled and signed claim form to the insurance company
  • Attach necessary nominee documents like PAN Card, Aadhar Card, etc. for age proof and Aadhar Card, Passport, recent telephone bill, etc. for address proof
  • Attach Original policy document
  • Copy of death certificate
  • Bank details where the benefit shall be deposited/cancelled cheque

In the event of disability of the insured

  • Application letter to the insurance company stating the current status of the patient
  • All medical reports and a medical certificate provided by the hospital
  • Address Proof and Age proof of the nominee
  • Bank details of the nominee

Tax Benefits: the premiums paid for the income replacement term insurance plan are eligible for tax exemption under section 80C of the Income Tax Act, 1961. Similarly, the benefit received is eligible for tax exemption under section 10(10D) of the income tax act.

Who Should Opt for Income Replacement Term Insurance? 

An income replacement term insurance plan acts as a pure insurance policy i.e. it only covers the death therefore it is designed to offer an only death benefit to the nominee or the beneficiary. This plan does not offer maturity benefit to the insurer in case the insurer outlives the policy tenure. The plan only offers financial protection to the family in the event of the untimely demise of the insured that too if the insured dies during the policy tenure. In the event of the death of the insured the nominee or the beneficiary will receive the death benefit as a percentage of sum assured every month. This monthly payout is similar to the income that the family or nominee would have received in case the insured had survived. To overcome the loss of income caused due to the death of the insured all the income is stopped abruptly but with an income replacement term insurance plan you can ensure that your loved ones receive a certain amount as income every month in your absence. Therefore, an income replacement term insurance plan must be availed by:

  • People who are sole bread-winners in the family
  • People who have dependents like spouses, children, parents, etc.
  • People who have monthly liabilities
  • People who want to ensure monthly financial security for their loved ones at an affordable cost

For example, an income replacement term insurance plan is very helpful for your family to cover the expenses incurred for all the necessary worldly activities. This plan is also helpful for those whose family members do not have a complete understanding of handling finances i.e. rather than managing lump sum money (death benefit) rather give them in instalments to help them best to take care of funds even in your absence. 

Best Income Replacement Term Insurance Plans in India (2020) 

The following are a few of the most popular income replacement term insurance plans offered by various insurance providers in India. Let us have a look at their features and benefits.

Name of the PlanFeatures and Benefits
HDFC Life Click 2 Protect 3D Plus Plan

The key benefits and features of the plan are as under:

  • Designed to provide comprehensive financial security to you and your loved ones
  • Customisation is allowed by choosing any 1 of the 9 available plan options
  • Under accidental total permanent disability and diagnosis of critical illness, all the future premiums are waived off
  • Flexibility to choose premium paying term and increase the insurance cover with a top-up facility at key milestones of life without undergoing medicals
  • The special premium rate for female insured and non-tobacco users
  • Tax benefits under section 80C and Section 10(10D) of the Income Tax Act
Max Online Term Plan Plus

The key features and benefits of the plan are as under:

  • The plan comes in 3 variants namely Basic life cover, Basic Life Cover + Monthly Income, and Basic Life Cover + Increasing Monthly Income
  • These 3 variants are designed to cater to various contingencies of life
  • Under Basic Life Cover + Monthly Income, and Basic Life Cover + Increasing Monthly Income is offered to the family to meet the financial expenses in case the insured is no more or is disabled
  • The premium paying term of the policy is only till the age of retirement i.e. 60 years, however, the insurance coverage is offered till 85 years
  • A comprehensive protection plan to cover the risk against death, dismemberment and critical illness
ICICI Prudential iProtect Smart

The key benefits and features of this top-selling online term insurance plan are as under:

  • The plan offers a special privilege of a lower rate of premium to female lives. Additionally, female lives get cover for diseases like breast cancer, cervical cancer, etc.
  • The plan offers a waiver of premium in the event of permanent disability to the insured due to accident. 
  • In the event of the death of the insured, the death benefit is paid to the nominee either in a lump sum, regular income, increasing income, lump sum + income as per the directions mentioned by the insured at the time of policy inception
  • Offers flexibility to enhance the insurance cover at key milestones of life like Marriage, childbirth, etc.
  • Insured can avail tax benefit for the premiums paid
  • The plan covers terminal illness like AIDS
Aegon Life iTerm Plan

The key benefits of the plan are as under:

  • A comprehensive term insurance plan designed to offer insurance coverage till the age of 100 years
  • The plan comes in 3 variants namely Life Protect, Protect Plus, and Dual Protect
  • Life Protect is designed to offer life cover + 100% payout in the event of diagnosis of terminal illness and provides an option to increase insurance cover at key milestones of life
  • Protect Plus is designed to offer life cover along with a 5% increase in sum assured without any additional premium. Additionally, 100% payout option is available in the event of diagnosis of terminal illness
  • Dual Protect variant offers life cover + 100% payout in the event of diagnosis of terminal illness + a regular monthly income is paid to the insured after attaining 60 years of age till the maturity i.e. 100 years
  • Avail tax benefits on the premiums paid as per the prevailing tax laws
Frequently Asked Questions
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