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What is Income Replacement Method Under Life Insurance?

The Income Replacement Method is a method in life insurance that involves determining the amount of coverage a person needs based on their income. This method aims to provide financial support to the family or dependents of an individual in case of their untimely death. 

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What is Income Replacement Life Insurance?

Income replacement is a method that helps determine the amount of life insurance policy you should buy. It meant that the final goal of a life insurance plan is to replace the lost earnings of a family’s sole earner who has died unfortunately. In this, the plan bought is based on the income the assured breadwinner can expect to earn during his/her life.

When we look only at how much money the person who supports the family is expected to earn in the future, the human life value gives a basic idea of how much life insurance is needed. The income replacement approach lets us change the human life value to make this estimate more accurate.

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How Does the Income Replacement Method Under Life Insurance Work?

Here is how the income replacement method under life insurance works:

Suppose Karan bought an income replacement life insurance and selected the benefit to be paid in monthly installments. He, unfortunately, suffered an untimely death in the 5th policy year, and his family received the sum assured in regular monthly income to replace the income he provided when alive. His family was able to use the benefit amount to pay for their child’s fees and pay off their remaining home loans.

What are the Benefits of Income Replacement Method in Life Insurance?

Here is a list of benefits of income replacement method in life insurance:

  • Guaranteed Life Cover: In case of death during the policy tenure, the insurer will pay the guaranteed sum assured to the nominee on the death of the policyholder as per the policy’s T&Cs.

  • Affordable Premiums: The premiums of income replacement life insurance depend on the type of life insurance you opt for. For example, income replacement term insurance will have much lower premiums than any other type of life insurance.

  • Suitable Sum Assured: You can select the right sum assured for your profile by using a human life value calculator. This uses your age and annual income to estimate the suitable sum assured for yourself.

  • Tax Saving Benefits: You can save up to 1.5 Lacs on the premiums paid under section 80C and receive benefits under section 10(10D) of the Income Tax Act, 1961.

  • Claim Settlement Process: The claim settlement process is much easier as most insurers are now settling claims within a few hours. You can check the CSR of the top insurance companies in India before buying the best term insurance policy in India.

Note: Know what is term life policy first and then buy a term plan for your loved ones.

Note: It is suggested to calculate the term plan premium on the term plan calculator online tool by Policybazaar before buying.

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What are the Factors to Consider Before Buying Income Replacement Life Insurance?

Let us take a look at factors you need to consider before buying an income replacement method in life insurance:

  • Enough Payout Amount: As the plan will provide regular income in your absence, you need to make sure that the amount is enough to fit their monthly financial needs.

  • Buy at Low Premium: You should always consider buying income replacement life insurance as early as possible to secure a large life cover at low premiums, since the premiums increase with age.

  • Suitable Policy Term: Select the right policy term, as the income replacement life insurance will only provide coverage and benefits for a specific tenure. Most insurance companies in India offer the option of extending the coverage till 99 or 100 years of age.

Note: You should also check the benefits of term insurance if you are planning to purchase the term insurance plan.

Wrapping it Up!

The income replacement method under life insurance is an option that allows policyholders to ensure their family’s financial security. You should always compare the available plans before opting for the most suitable income replacement method under life insurance.


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