How does an income replacement term plan work?

An income replacement term plan works by providing regular monthly pay out to the beneficiaries, which is a fixed proportion of the death benefit. In the event of the death of the life insured, the sum assured is paid as death benefit to the appointed beneficiaries at regular intervals, instead of single lump sum pay out on death.

Is the premium of an income replacement term plan affordable?

Since an income replacement term plan is a pure protection plan, the premiums are typically affordable even if the sum assured for the plan is high. However, the exact amount payable as premium will vary based on multiple factors such as age of the life insured at the time of entry, his/her lifestyle choices such as tobacco usage, pre-existing medical conditions, the premium payment term, the policy term, add-ons/riders chosen and much more.

Are there any tax benefits included in an income replacement term plan?

If you purchase this type of term insurance plan you can claim tax deductions u/s 80C for premiums paid to keep the policy in force. Moreover, the death benefit received by nominee(s) in the event of the life insured’s demise is also tax free under Section 10(10D) of the Income Tax Act.

What type of add-ons and riders are available with a term plan that provides income replacement?

Typically, add-ons and riders that are commonly available with an income replacement term plan to enhance the protection offered by the policy. These include critical illness and disability rider, return of premium, terminal illness rider, accidental death and disability, etc. It is however important to remember that you may need to pay an additional premium amount to avail the benefits of these riders and these will add to the cost of purchasing the income replacement term plan.

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Income Replacement Term Plan

Q: What is an income replacement term plan?

As the name suggests, an income replacement term plan provides the death benefit to the nominee(s) in the form of regular income usually paid out monthly. Such plans may further allow customisations wherein a portion of sum assured is paid as lump sum in the case of demise of the life insured. The regular income option is designed to replace the loss of income of the life insured in the case of their unexpected demise.

An Income Replacement Term Plan is exactly what it sounds like – a term insurance plan offering protection along with income benefits. It is a good option for those who wish to secure the financial future

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What is an Income Replacement Term Plan?

An Income Replacement Term Plan is a type of term insurance policy where the death benefit is split between two portions. While the first part is paid as a lumpsum, the second portion of this amount is paid at regular intervals to the beneficiary, contrary to a normal term plan.
The term income replacement refers to the monthly payout of a fixed proportion of the death benefit to the nominee after the demise of the life insured. While this may not mean that all potential future income will be replaced, an income replacement term plan will ensure a steady stream of income for the beneficiaries over an extended period of time.

What does an Income Replacement Term Plan offer?

The following are the benefits offered by an Income Replacement Term Plan:

• Replacement of Income

Policyholder, at the time of purchasing the policy, has the option to choose the way in which death benefits of the policy is paid out. You can choose a portion of the death benefits to be paid out as a lump-sum amount to the nominee(s) and the remainder amount will be paid out at regular intervals to act as replacement of the future income that has been lost due to demise of the life insured. Alternatively, you can also choose that the death benefits of the policy be paid only on a monthly basis to act solely as income replacement. This customization is allowed as per the preference of the policyholder.

• Tax Benefits

Just like other term insurance policies, the premiums paid for maintaining this type of life insurance policy is eligible for tax deduction benefits u/s 80C of the Income Tax Act, 1961. Additionally, the death benefits received as regular income from these plan are tax free as per rules of Section 10(10D) of the Income Tax Act.

• Financial Protection During Policy Term

These plans are pure protection plans with a fixed policy term. This means that while the plan is in effect the primary focus of an income replacement term plan is to provide the policy beneficiary with financial protection so that they can reach key life goals like dependent children’s higher education and marriage, without having to compromise their lifestyle.

Why should you get an Income Replacement Term Plan?

If you want to provide your family with a regular income paid out over time instead of a lump-sum pay-out subsequent to your death, then going ahead with an Income Replacement Term Plan is definitely a viable option.
This ensures that your family receives a regular income to carry out their day-to-day affairs while, additionally, if a portion is paid out as a lump-sum, (if opted by the policyholder), the larger payout can be saved and/or invested for future requirements or emergencies.
Depending on the corpus available as death benefit from these plans, you can also choose the pay-out period as per the requirement of your family so that important events like completion of higher education, paying off a loan or marriage of children is carried out without impacting the lifestyle needs of your loved ones.

Who should opt for an Income Replacement Term Plan?

While purchasing a term insurance plan that provides the benefit of income replacement should be a part of everyone’s financial plan, below are a few groups of individuals who should definitely consider opting for this option

• Individuals with Dependents

Such individuals must consider choosing an income replacement term plan if they are planning to secure the financial future of their dependents in case of an unfortunate eventuality. One should however remember that this type of life insurance plan does not typically include maturity or survival benefits.

• Individuals Who Are Sole Earners

In case you are the sole earner in your family, opting a term plan with regular pay-out of death benefits is definitely suited to your needs. This way you can have peace of mind that your loved ones will be financially secure and have access to regular income in the case of your unexpected demise.

• Single Parents

For such individuals, an income replacement term insurance plan can prove to be a boon for the child/children, in case of your unfortunate demise. Since you are the sole provider for your family, ensuring that your kids are financially secure and well-placed to reach their career and personal goals is exactly the prime focus of this plan.

• Individuals with Substantial Outstanding Debts

If you have sizeable outstanding debts such a home loan, then you should definitely consider opting for a term plan that offers income replacement. This will ensure that even in the case of your untimely demise, your family can keep up with the regular EMI payments so that they can continue to enjoy the benefits of the asset(s) you have purchased for them.

What are Other Benefits of Income Replacement Term Insurance Plans

A few other benefits of these plans that one should keep in mind include the below:

1. Peace of mind for life insured and dependents

The life cover benefit of a term plan provides a payout on death of the insured individual. This can help the beneficiary to get compensated for any income loss occurring due to the untimely demise of the insured person.

2. Flexibility to tailor the plan based on:

Pay-out period – this allows you to choose a suitable period over which the regular income benefits of the plan will be paid out

Option to customize the split of death benefits into lump sum and regular pay-outs instead of having to choose only one of the options. This ensures further flexibility for the beneficiaries.

FAQs about Income Replacement Term Plan

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