An income replacement term insurance plan is a more advanced version of a term insurance plan. It is a comprehensive plan which will fit your family well and provide them with the best benefits in case of your death.

In an income replacement term insurance plan, the insurance company pays the nominees or the family members of the insured a percentage or a cut from the sum assured each month for a particular number of years. Basically, it is what the name suggests, an income replacement.

So, if the insured dies during the tenure of the insurance policy, his/her family or their nominees are paid a regular cash payment, which they will receive monthly. This acts to recompense the family for the loss of the monthly family income, which they were probably dependent on, especially if the deceased was the bread-winner of that family.

Once the amount of the sum assured is exhausted, the policy is terminated and no further payments are made to the nominees, regardless of what month of the year it is.

The income replacement term insurance is a death benefit plan. It has no provision for a maturity benefit. The payment of the sum assured is not made once the tenure has been completed; it is only made in the event of the death of the insured. If the insured dies, then the insurance company makes the payment to the nominees every month.

How does the Income Replacement Term Insurance Plan Work?

Suppose you have chosen a sum assured of 70 lakhs

In the event of your death, your nominees will receive a monthly payment, which will be a percentage of the 70 lakhs.

You may wonder till when would your beneficiaries receive this amount? Till the entire sum of 70 lakhs has been paid to the nominee, after which the insurance plan will terminate.

If your nominees/family members are receiving 5 lakhs per month, then the payments will be made for 1 year and 2 months before the sum assured is exhausted and the payments stop.

Applying for the plan

If you have dependents who do not earn a monthly wage or salary, you should opt for the income replacement term insurance policy plan. Especially, if you have dependents like children, parents, spouse, siblings, etc., you should take up this plan. Also, if you are obligated to provide or wish to provide financial security to your dependents at a low cost, this plan is the best option for you. Should you choose this plan instead of a lump sum term insurance plans, you can be sure that your family will be able to carry out the necessary daily activities thanks to the steady source of income each month.

How is the Income Replacement Term Insurance Different from a Regular Term Insurance?

The Income Replacement Term Insurance and Lump Sum Term Insurance are both types of term insurance plans.

Income Replacement Term Insurance:

Under the income replacement term insurance policy, the nominees of the insured receive the sum assured in installments throughout the years till the sum assured is fully paid off on the basis of monthly payments. In this case, all the worries of whether the dependents would be able to calculate their monthly expenses are also relieved as this policy pays out a percentage of the sum assured each month instead of a large sum of money.

This kind of term insurance plan is beneficial when your nominee(s) is a child or does not have a job to maintain their livelihood. The monthly payments will help them go about their lives with the basic amount to spend for their needs. If you fear that your children may not be able to handle large sums of money at such a tender age, the income replacement term insurance plan is the best term insurance plan to opt for in such cases. Also, if you have elderly, retired parents who are dependent on you, purchasing this plan will ensure that they receive a monthly payment for as long as possible to sustain themselves own after your demise.

Regular/Lump sum term insurance plan:

In this plan, the nominee of the insured receives the sum assured of the insurance policy as a lump sum amount, meaning that they receive the whole amount at once which also immediately terminates the policy as the whole amount of the sum assured is paid at once. However, for such plans, the nominee should be financially adept at handling large sums of money at a go.

If not the income replacement term insurance, then what?

There are quite a few variants of the term insurance plan. They are as follows:

• Fixed Monthly Payments

The fixed monthly payments variant of term insurance pays the nominee a fixed amount for a specific number of years. The fixed amount is decided and paid on a monthly basis. Suppose, the sum assured is INR 3 crores, then the monthly payouts would be made at INR 1,00,000 every month for 3 years, after which the sum assured will be over and the policy will be terminated.

• Lump sum + monthly payments

This variant of term insurance is a combination of fixed monthly payments along with a lump sum payment. A part of the sum assured is paid to the nominees in a lump sum and the remaining amount is divided into parts and paid to them on a monthly basis for a fixed number of months or years until the sum assured is over. Suppose, the sum assured is INR 3 crores, then INR 1 lakh would be paid in a lump sum and the remainder which amounts to INR 2 crores would be paid monthly at INR 1 lakh each month for a period of 2 years after which the sum assured will be over and the policy will be terminated.

• Payouts multiplied

Another variant of term insurance is when the monthly payouts are multiplied at a pre-determined rate annually for a certain period of time, at a fixed percentage, or it is calculated on the basis of the rate of inflation. 

Conclusion

You have to carefully analyze your family members and see what kind of variant of the term insurance plan will be most suitable for them in case of your unfortunate demise. If you have loans, the best thing to do is to not choose the income replacement term insurance plan, as the lump sum variant of the term insurance plan will help them pay off the loans fast enough and get rid of the tension soon.

Choose carefully and plan well!

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