image title
TERM INSURANCE

Income Replacement Term Insurance Plan

Sumit Asrani Sumit Asrani 05 October 2017
5.0 (2 votes)

A term insurance plan is a pure death benefit plan and a sure shot way to provide financial security for your family at a low cost. And an income replacement term insurance plan is a comprehensive plan which can be the best fit for your family. Read on to know more.

image title

Not sure if the income replacement term insurance plan is the right choice for you? Let me open the gateway to the facts and insights. It will obliterate all your doubts. And you will be confident of making the right choice. Because when you have the right knowledge about term insurance plans, you have the power to make things better for yourself and your family. That is all you want – a right term insurance plan for your family and loved ones.

So, join me. And know everything about the income replacement term insurance plan.

What is Income Replacement Term insurance plan?

As the name suggests income replacement, the insurance company promises to pay the nominee a percentage of sum assured every month for a fixed number of years.

In simple terms, if the life assured passes away during the policy tenure, the nominee as mentioned in the policy document will receive a regular monthly cash flow due to the loss of the monthly income.

For instance, a thirty-two-year-old man opts for an income replacement term insurance plan with a sum assured of Rs.50 lakh. He opts the plan for 35 years as a policy period. Let’s say, the life assured passes away at the age of 52 years, his nominee – his wife, as mentioned in the policy will receive a percentage of Rs.50 lakh (sum assured) for a fixed number of years. Once the total sum assured is paid to the nominee, the policy terminates and no other payment shall be made to the nominee.

The above-mentioned case is the simplest example of an income replacement term insurance plan. The other variants that most of the life insurance companies offer under the income replacement term insurance plan are explained in the other section of this post.

Another thing you must know is that most of the life insurance companies offer customization of income replacement term insurance plan. You can customize the plan with respect to the sum assured, policy tenure, monthly payment payout, and so on.

How an Income Replacement Term insurance plan helps your family?

In an unfortunate event of an untimely death of the life assured during the policy period, the nominee receives monthly installments. These monthly installments of cash flow help your family to maintain monthly household expenses and other financial needs. This way it replaces the loss of the income due to the untimely demise of the life assured.

Now, the question is, whether this is the right type of term insurance plan for you? For that let me explain with the help of 3 quick guiding pointers.

The first pointer will help you to dig deeper into your needs and help you to align those needs with the type of term insurance plan you should opt. The second pointer will help you to decide if the income replacement term insurance plan is the right choice for you. And the third pointer will distinguish between the two of the most commonly available types of term insurance plans. When you are done with all the three pointers, you will have the power of choice. The choice will be purely yours based on the right term insurance plan.

Let's elaborate the importance of an income replacement term insurance plan with the help of an example:

A husband informs his wife about buying a term life insurance plan. He explains to her how a term insurance plan works. And that she, as a nominee will receive the sum assured (death benefit), in case of him passing away during the policy tenure.

After listening to her husband, she asks him, “How would I handle such a substantial amount of money?”

“Shall I invest in mutual funds, or the stock market, or put it in a Fixed Deposit in the bank?” Now, he himself is in dilemma.

In case you are not sure or you are in a similar situation, read the following few check posts to understand whether or not an income replacement term insurance plan is suitable for you.

So, let's begin with the first pointer – why should you buy an income replacement term insurance plan.

Why should you buy an Income Replacement Term insurance plan?

  • If you are the only breadwinner in your house

  • If you know monthly cash flow would be a better way to provide financial security to your dependents that would help them to carry monthly expenses

  • If the dependents are not financially educated to handle personal finance very well

  • If the dependents won’t be able to handle a large amount of money at a time

  • If your dependents have no knowledge of investing a large amount of money

Note: It is highly advisable to opt for an income replacement term insurance plan if you do not have any loan. But, even if you have a loan, you can still find a variant of income replacement term insurance plan as a combination of lump sum and income replacement term insurance plan. All this is covered in the below section of this post. So, stay tuned.

For now, I'll move ahead with the second pointer, who should opt for an income replacement term insurance plan.

Who should opt for an Income Replacement Term insurance plan?

An income replacement term insurance plan is a death benefit plan. There is no maturity benefit. If the life assured passes away during the policy period, the nominee would receive a percentage of sum assured every month as an income replacement due to the loss of the income.

Hence, you should buy an income replacement term insurance plan:

  • If you have dependents – spouse, children, dependent parents, etc

  • If you wish to provide financial security to your dependents at a low cost

  • If you know that it would be difficult for them to get back financially on their foot in case something happens to you

  • If you know that having a source for monthly cash flow would help them to carry out all the necessary worldly activities as the way you would have provided

Difference between Lump Sum and Income Replacement Term insurance plan

A notable difference between a lump sum term insurance plan and an income replacement term insurance plan is the payouts.

In a lump sum term insurance plan, the nominee receives the sum assured as a lump sum amount, that is, the total payout of sum assured at once and the policy terminates. Here, the beneficiary must know how to handle the large amount cash or should have a sound financial knowledge to save and invest appropriately.

On the other hand, in case of an income replacement plan, the nominee receives the sum assured in installments as monthly payouts which are easy to manage and helps in carrying out monthly expenses without any hindrance. In this case, the nominee neither has to worry about handling a large amount of money nor about the monthly expenses.

Choice is yours – Variants under Income Replacement Term insurance plan

Who doesn't like to make a choice? Especially, when you have all the options to customize your income replacement term insurance plan? You can customize to best fit your needs.

Most of the life insurance companies do offer variants of income replacement term insurance plan.

The most common variant is a combination of lump sum and income replacement term insurance plan. When you opt for a combination of payout under the income replacement term insurance plan, the nominee receives a part of a sum assured as a lump sum payout at the time of claim, and the rest of the money is paid in monthly installments.

Note: All the figures are indicative. The below examples with figures are just to show you the differences between the variants of an income replacement term insurance plans and may vary from insurer to insurer.

Example: A vanilla income replacement term insurance plan would be

Sum AssuredPayout*
Rs. 1 crore Monthly Installments – Rs. 1 lakh/month for 8 years and 4 months

Example: A combination of a lump sum and monthly installments under income replacement term insurance plan

Sum AssuredPayout*
Rs. 1 crore Lump sum payout – Rs. 50 lakh
Monthly Installments – Rs. 50,000/month for 8 years and 4 months

Example: A monthly installment payout with increasing sum assured. This plan considers the rate of inflation at fixed incremental percentage.

Sum AssuredPayout*
Rs. 1 crore Lump sum payout – Payout of the total sum assured opted at the time of inception
Monthly Installments – 0.5% Sum Assured over a period of 10 years

Note: All the figures are indicative and may vary from insurer to insurer.

Make your choice. And make the right one.

A right term insurance plan is what you must opt for. But if still any doubt persists please do not hesitate to contact us. Our team of experts will readily help you to make the right decision.

Leave a rating!
5.0 (2 votes)
Sumit Asrani
Written by Sumit Asrani
He's a writer. His blood cells are woven with Hypergraphia, as he breathes in books, he exhales words and sneezes poetry. Captivated by the web-of-words he's trying to escape miraculously as a content writer at Coverfox.com.