What is a Passive Income Why should you Use it to Buy a Term Plan?

Written by : Knowledge Center Team

2021-03-12

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Passive income or income from investments is not just a dream; it is a necessary goal for almost everyone who has an income from a single profession. It is preconceived notion that once you have a secondary source of income, you no longer need to invest your money.

However, will it work for every situation? Is there a possibility that a term insurance can help you to secure your life goals?

At least it doesn’t cost to consider, especially when you can secure the insurance at a nominal cost. But before we dwell on the benefits of a term insurance, let's understand the meaning of passive income.

What is Passive Income?

Passive income, as the name suggests, is an income that you can generate without having to work for it. So, it means that you are no longer heading to the office or business every day and still receiving enough money to:

Look after your regular needs
Look after your dependent’s needs
Take care of the future financial goals

The usual way of generating this kind of passive income is to have a large investment corpus allocated in income-generating assets. Most popular income assets could be blue-chip equity stocks, monthly income plans, pension plans, real estate and fixed income investments.

In a way, you have enough wealth that you do not need to work to save more money. However, your income from this wealth will depend on the ongoing rate of return and many other economic factors. This will also mean that you may have to be flexible with your monthly budgets.

Advantages of Passive Income

Passive income offers a great advantage to you and your family which employment doesn’t offer – “continuity”. Your passive income is not dependent on your efforts (at least not entirely). So, even if you are no longer in the picture the income will continue.

Thus, your family doesn’t have to worry about the income even if you meet the ultimate fate before your children are financially independent.

However, the assumption that the passive income does not depend on you would be like saying, ‘your financial decisions did not affect enabling the income.’

So, it would be wrong to assume that the passive income will not be affected after you are not there to manage it. It is only possible if your surviving family members are equally financially savvy and can decide the following regularly:

Where to invest?
When to switch investment asset?
How much to withdraw?

Need for Term Insurance

Still, feel term insurance is unnecessary? Term insurance doesn’t just provide a supporting wall until your dependents can stand on their feet financially. Term insurance also helps your family with other important financial decisions.

Meeting the Large Financial Goals

Some of the most important financial decisions are when you need to meet a large financial goal. Without you, your family will have to depend on the wealth which is generating an income for them. If they use this wealth to meet big goals like the child’s higher education and marriage, the family income is bound to take a hit.

Looking after Regular Living Costs

The family needs money regularly, especially every month, to look after the regular living expenses. Without a long-term and regular income support, the surviving family may end up compromising on their lifestyle.

Additionally, if they need regular income support for a long time, they will also face the impact of inflation on their necessary expenses.

In such a scenario you cannot rely on the passed on estate to generate enough passive income for filling in the gaps.

How Does a Term Plan Help with these Challenges?

A term insurance can help you resolve multiple petty issues related to expenses and money. For example, term insurance helps you and your family in the following ways:

Helps secure the life of your family members
May help your children at a later stage of life in their education and marriage
Takes care of wealth transfer costs
Keeps your accumulated wealth intact
Considers inflation by allowing you to increase the sum assured with changing life stages

Your family will have enough time to make better decisions with your existing wealth to preserve it and use it prudently. Additionally, the lump sum amount can help them save for their future goals; pay out the debts and liabilities.

A standard term insurance plan will expire the moment you survive the policy term. However, if you use a whole life term insurance plan, you can continue the same life cover till the age of 99.

If you survive till the age of 99, you receive the plan’s benefit amount. But even in case of your natural death before the age of 99, your family will receive the benefit amount. Not, to mention the plan’s critical illness cover. This will pay the sum assured if you are diagnosed with a dreaded disease like cancer.

So, even if you have good enough wealth to provide adequate income to your family, term insurance will still make their life a lot safer and sorted, financially.