Benefits Of Income Replacement Term Insurance Plans

Benefits Of Income Replacement Term Insurance Plans

Income replacement plans get you a life cover typically 10-20 times your annual income, providing financial security for your family in your absence.

Written by : Shipra Chaudhary

Reviewed by : Akanksha Gangvany

Akanksha Gangvany

2023-01-22

178 Views

10 minutes read

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Imagine if your income miraculously continues for your family, even after your untimely demise. Can there be better financial security for your loved ones? Perhaps not, and you can create this safety for your family with online term insurance plans.

Table of Content

What is Income Replacement Term Insurance?

Income replacement term insurance refers to a benefit pay-out option some of the best term insurance plans offer. You can choose the regular income pay-out option for your family along with a lump-sum payment.

For example, if you buy a term insurance cover of Rs 2 crores, you can divide the total benefit between lump sum pay-out and regular income. If you choose a 50:50 ratio for both, your family will receive a lump-sum payment of Rs. 1 crore, while the remaining Rs 1 crore will be converted to a monthly income.

You can choose a term of up to 40 years for the monthly income to continue for the family.

Who Should Opt for Income Replacement Insurance?

Income replacement insurance is particularly beneficial for people between 18-65 years of age, as they are typically the primary breadwinners in their households.

In India, individuals within this age range are generally eligible to purchase income replacement plans. However, it's important to note that the specific eligibility criteria may vary across different insurance providers and their respective term plans. Therefore, it's essential to carefully review the policy document of the desired income replacement plan to understand the exact eligibility requirements before making a purchase decision.

By opting for an income replacement insurance policy, individuals can ensure that their financial obligations and the well-being of their dependents are protected in case of a disability or illness that prevents them from earning their regular income. This can provide peace of mind and financial security during a challenging time, allowing the policyholder to focus on their recovery and rehabilitation without the added stress of financial concerns.

Benefits of Buying Income Replacement Term Insurance Policy

An income replacement term insurance policy provides your family with a steady monthly income to maintain their standard of living while also offering comprehensive life coverage and tax benefits - all at an affordable cost. This makes it a valuable financial planning tool to secure your family's future.

Here are the key benefits of buying an income replacement term insurance policy:

  • Guaranteed Death Benefit: The policy guarantees a fixed monthly income to the nominee(s) until the entire sum assured is paid out, providing financial security.
  • Stress-Free Life for Dependents: The regular monthly income helps the nominee(s) meet their ongoing financial obligations without worrying about managing a lump-sum payout.
  • Inflation Protection: The policy can offer an increasing monthly income option, which helps the family's purchasing power keep up with inflation over the long term.
  • Affordable Premiums: Income replacement term plans tend to have relatively low premiums, especially if purchased at a younger age.
  • Adequate Life Cover: These plans allow you to get life coverage of 10-20 times your annual income, ensuring your family's long-term financial needs are met.
  • Tax Benefits: The premiums paid for the income replacement term plan are eligible for tax deductions under Section 80C of the Income Tax Act.
  • Paperless and Convenient: The application and purchase process for these plans is mainly digital and paperless, making it easy and accessible.
  • Quick Claim Settlement: Many insurers offering income replacement term plans have high claim settlement ratios, ensuring your family receives the benefits promptly.

Income Replacement Term Insurance Benefits

Given below are the benefits of income replacement term insurance for you and your family:

Zero Stress for Family

Before the income replacement concept, term insurance benefits were only paid in lump-sum. Although it would seem like a welcome development for the grieving families, the family would soon start facing difficulty with the money.

The amount, although seemingly large for the moment, needs to suffice for the family for more than 4 to 5 decades.

Most families would have never managed such a large sum of money. Few wrong decisions can derail their financial future. One of the biggest challenges was to invest the large sum of money towards a regular and safe income for the family.

The simplest solution to this problem was annuity plans from the life insurers. Meaning the money received from the insurer will need to be deposited back with them to generate a safe and steady income.

Regular income features in the term insurance plan remove all these hurdles from the path of your family. They can focus on their goals and lives while the term insurance plan takes care of their monthly income.

Take Care of the Monthly Household Budget

If you have a steady income, you provide your family with a fixed monthly budget. Without an income, the family constantly worries whether they are spending more or too little.

However, with a regular income in place, the household budget can remain steady, and families can focus more on long-term goals. The best term plans with regular income features have the option to provide an increasing income to your family.

You can choose the percentage increase at the time of buying the policy. The income increases at this fixed percentage every year.

Inflation-Adjusted Income

Income replacement term insurance plans also provide the option to give the family an increasing income. Increasing income would be a better option for the family, especially when they will depend on this income for a long time.

The same amount of income over a long time means the family will have a declining lifestyle due to inflation. However, increasing income gives them a chance to maintain their lifestyle over time.

Did you know?

The IRDAI developed micro insurance plans category to boost insurance penetration in these segments. The guaranteed amount under these policies is INR 50,000 or less. 

Source: IRDAI

Claim Settlement Ratio

How is Income Replacement Term Insurance Different from Regular Term Insurance?

The key difference is that Income Replacement Term Insurance provides a regular monthly income to the beneficiaries, while Regular Term Insurance provides a lump sum amount. Income Replacement plans are designed to replace a portion of the policyholder's income to help the family maintain their standard of living in the event of the policyholder's death. Here is a tabular representation of their difference points.

BasisIncome Replacement Term InsuranceRegular Term Insurance
PayoutProvides a regular monthly income to the beneficiaries upon the policyholder's death during the termPays out a lump sum amount to the beneficiaries upon the policyholder's death during the term
IncomeReplaces a portion of the policyholder's income to help the family maintain their standard of livingProvides a lump sum amount that the family can use at their discretion
FlexibilityOffers flexibility in choosing the income payout period and whether the income is fixed or inflation-adjustedOffers flexibility in choosing the policy term and sum assured amount
Tax BenefitsPremiums paid may qualify for tax benefits under the Income Tax Act in many countriesPremiums paid may qualify for tax benefits under the Income Tax Act in many countries
BeneficiariesBeneficiaries can be family members, dependents, or anyone the policyholder choosesBeneficiaries can be family members, dependents, or anyone the policyholder chooses

Savings/

Investment

Does not typically have a savings or investment component and is a pure protection policyMay or may not have a savings or investment component depending on the specific plan

Important Factors to Consider While Purchasing Income Replacement Plans

The key is to carefully evaluate your needs and find a plan that provides the appropriate coverage, flexibility, and value to protect your income in case of a disability or illness. Here are the important factors to consider when purchasing income replacement plans:

  • Coverage Amount: Determine the appropriate coverage amount that will replace a sufficient portion of your income in the event of disability or illness. This should be based on your current income, expenses, and financial obligations.
  • Benefit Period: Decide on the length of time you need the income replacement benefits to last, whether it's short-term (e.g., 2 years) or long-term (e.g., until retirement age).
  • Elimination Period: This is the waiting period before benefits begin after becoming disabled. Shorter elimination periods provide quicker access to funds but may have higher premiums.
  • Disability: Understand the plan's definition of disability, as some may only cover "own occupation" while others cover "any occupation". The former is more comprehensive.
  • Exclusions and Limitations: Review the policy carefully for any exclusions or limitations on pre-existing conditions, mental health, or other circumstances that may limit coverage.
  • Premiums and Affordability: Ensure the premiums fit within your budget and that the policy remains affordable long-term, as premiums may increase over time.
  • Portability: Determine if the policy is portable, meaning you can keep it if you change jobs or retire, as this provides more flexibility.
  • Rider Options: Consider adding riders, such as cost-of-living adjustments or partial disability coverage, to enhance the policy's benefits.

Wrapping Up

Income replacement term insurance is a smart way to protect your family's financial future if something unexpected happens to you. It provides financial protection to your loved ones if you pass away during the term of the policy. This money can help pay for everyday expenses, outstanding debts, and future costs like your children's education. 

The best part is that term insurance is very affordable, especially when you're young and healthy. Premiums are low, and you can get extensive coverage at a small cost. Income replacement term insurance gives you peace of mind, knowing your family will be taken care of if the unthinkable occurs. It's an important part of a solid financial plan to protect your loved ones. Income replacement is a useful addition to online term plans. Just make sure to select the best option for your family while buying the plan, as you cannot change the option later.

Glossary

  • Inflation Protection: A feature in insurance policies that adjusts income payments to keep up with inflation.
  • Elimination Period: The waiting period before benefits begin after becoming disabled.
  • Benefit Period: The length of time during which benefits are paid out under an insurance policy.
  • Human Life Value (HLV): A method used to calculate the economic value of a person's life, used in determining insurance coverage amounts.
  • Premium Waiver: A feature that exempts the policyholder from paying premiums under certain conditions, like disability.
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FAQs to Benefits Of Income Replacement Plans

Purchasing a life insurance policy that provides income replacement is a way to guarantee your family will have a continuous source of income even in your absence.

Yes, you can typically customise your insurance plan to suit your specific needs. Most insurance providers offer a range of coverage options and add-ons that allow you to tailor your policy. For example, you can adjust your deductibles, coverage limits, and premiums to balance your protection and budget.

Income replacement insurance plans offer tax benefits under the Income Tax Act. The premiums paid for these plans can be claimed as a deduction under Section 80C, up to a maximum limit of ₹1.5 lakh per financial year. Additionally, the death benefit received by the beneficiaries is generally exempt from tax under Section 10(10D).

The income replacement approach uses the Human Life Value, or HLV, to calculate how much money a person would need to sustain their family or dependents during their working years.

An income replacement insurance plan pays beneficiaries a recurring income instead of a lump payout, which helps with daily needs, education, and other obligations. With a defined payout period of 5, 10, 15, or 20 years, the plan guarantees financial support for a predetermined amount of time.

An income replacement insurance plan can benefit a wide range of individuals, including employed individuals, self-employed professionals, families with dependents and  individuals with limited savings or assets. Essentially, it can benefit anyone who wants to protect their financial well-being and ensure a steady stream of income in the event of a covered disability or illness.

Certainly, plans for income replacement insurance are made to be reasonably priced, providing substantial coverage at affordable premium rates.

Absolutely, you can adjust the coverage quantity to meet your specific needs with the majority of insurance companies. You can choose a coverage amount  according to your income, expenses, and your dependents' financial requirements.