Income replacement term insurance is a type of life insurance plan where the dependants of a policyholder, after his demise, are paid a fraction of the total policy amount as a lump sum, and small regular monthly payments over a period of a few years. In regular life insurance plans, the family or dependents are paid the entire sum amount after the demise of the policy holder.
Most of the times, people are not sure what to do with the huge sum received from a life insurance policy. They usually end up spending all of it in just a few years, leaving no source of regular income for the family. The Income replacement term insurance plan allows you to manage your policy such that your family or dependents can receive a regular monthly income after your demise.
Why do we need an Income based term insurance plan?
The basic need of an income replacement term insurance arises from the fact that the family, especially sole earning families of the deceased needs a regular income source. Here are some other reasons why Income replacement insurance plan is useful.
- People are often not sure how to handle the large insurance amount received at once.
- In many cases, spouses or families of the deceased are not smart enough to make proper investment decisions.
- Income replacement insurance plan creates a regular source of income for your family or dependents.
- You can decide the amount and period to be received by your dependents.
- It is a more reliable income option than any investment scheme.
Simply leaving behind a good amount of insurance money is not enough; you also need to ensure a proper way for your family to receive that money so that they never face financial problems. Once you're gone, you cannot see or manage how your family chooses to spend the sum received from your life insurance policy. Therefore, it is important to purchase a reliable income replacement term insurance plan that can provide proper financial assistance to your family on a monthly basis.
How does Income Replacement Life Insurance Plan help?
An income replacement plan divides the entire policy sum into a one-time lump sum payment, and regular monthly payments to be paid over the next few years. The lump sum amount is paid soon after the demise of the policy holder. The amount is usually enough for the family to cover the immediate expenses and take care of important things. Then, the insurance company starts paying a monthly sum of a fixed amount to help the family meet their regular expenses. This amount is paid for the next 10-15 years, as defined in the policy agreement. The total amount received this way is usually higher than the sum assured.
The annual premium amount of income replacement plan is usually higher, but the return on investment is also higher.
It is natural for the family or dependents to be unaware of the proper ways to handle the sum or invest it to ensure a regular income source. Income replacement term insurance is mainly beneficial for sole earning families, or households where people are not comfortable in making proper financial decisions. It is the responsibility of the policyholder to make such decisions for his/her dependents.
Important things to know about Income Term Insurance Plans
There are many things one should know about insurance replacement term plans, before buying a policy. First of all, there are many variants of these term plans and each may have its own conditions. Other things are explained below.
The policy holder is given the freedom to choose the lump sum amount, monthly sum, and time period for monthly payments. One should consider the minimum amount required by his family for their monthly expenses including basic expenditure, education, bills, etc. You can then divide the total sum accordingly.
Most term insurance plans will pay the sum assured amount only in case of death of the policyholder. There is no maturity benefit provided with these plans.
A part of the total sum assured is given as a lump sum to meet the immediate finance requirements of your family. You can choose this amount at the time of purchasing the policy.
Some other features and benefits of Income Replacement Term Insurance Plan include the following.
- Affordable premiums with good return on investment
- Regular and emergency financial support for the beneficiaries.
- Flexibility to choose payment amounts and period.
- Gives enough time to your family to figure out an alternative way of income.
- Special discounts and benefits.
Many insurance companies will also let you frame a number of variants for the monthly payments to be paid during the period. You can choose to increase the amount by a fixed percentage every year or on any other basis like the rate of inflation.
Naval Goel is Founder & CEO PolicyX.com