People are often baffled about what is to be done with the benefits received from a life insurance plan after the demise of the policyholder. You can invest it to generate a regular income, make use of a fraction of the lump sum every month until it ends, or look for another means to channelize the profits efficiently.
A nationwide study was held by Forbes LearnVest on Life Insurance. This study exposed that around 65 per cent people are not fully familiar with their life insurance plans. This gets us to an imperative point – that simply leaves behind a considerable amount as a death benefit is not enough, your family and dependents should also have knowledge about how to put that lump sum to best and effective use, failing which, they might face financial problems.
The insured might feel that an appropriate life insurance product having large sum assured is enough for their family and dependents to accomplish key goals of life and sustain their lifestyle. However, the fact stays on that regular expenses are needed to be met on a monthly basis, and a one-time lump sum might sometimes leave the recipient mystified about how to put in or use that money, especially when they are not aware of the financial mumbo-jumbo.
Income Replacement Life Insurance Plans:
Keeping this in mind, a lot of life insurance companies have introduced a new plan variant of life insurance – an income replacement life insurance plan. These plans come with an aim to rescue if the insured has a feeling that his dependent might not be able to handle or invest the lump sum payout efficiently.
Income replacement plans, after the demise of the policyholder, payout fraction of the benefit as a lump sum, and also make payment of regular monthly income over a specific period, for about 10-15 years, for example. In other words, the income replacement plans break the entire assured sum into a one-time payment, along with a continued monthly compensation. But this is not enough to make these plans interesting. The total amount received by the beneficiary or the nominee, over a period of time, is more than the sum assured mentioned in the policy.
The lump sum amount can remain the same, as an alternative, and the family or dependents of the policy holder will be paid an additional amount every month. Here, even though the annual premium would rise to a certain extent, it would be of value because:
The return on the money invested would be high.
The beneficiary, at that point of time, might not be in a condition to comprehend the ways and means to maximise the returns.
Income replacement life insurance products make sense for sole earning households, and where your spouse or family is not financially smart enough or is comfortable in making robust decisions about investments.
Variants of the Term Plans:
A term plan is the best of all forms of life insurance. However, there are many variants of a term plan:
There will be no maturity benefit received in any variant of the term insurance plan.
The beneficiary or the nominee will receive the Sum Assured only in the case of death of the insured.
The only difference is in the way of payment of the Sum Assured to the beneficiary or the nominee under the policy.
In regular term life insurance cover, the nominee receives the entire sum assured in case of the demise of the policy holder.
This may not be the case under the other variants. The payout may be spread over a period of time. A few illustrations are:
Fixed monthly payout for a specific number of years – For example, Rs. 1 crore sum assured would be paid out in monthly instalments of Rs. 1 lakh over 100 months.
A part of the amount assured is rewarded as lump sum and the remaining sum is remunerated on a monthly basis for a fixed number of months – For example, Rs. 50 Lakhs of lump sum and Rs. 50, 000 are paid on a monthly basis for 100 months.
Monthly payouts that multiply at a pre-specified rate yearly for a particular number of years – at a fixed percentage or depending upon the rate of inflation.
There can be n number of variants as Insurance is a contract and you can frame a contract in any way.
These variants of the term plans are referred to as Income Replacement Term Insurance Plans to distinguish it from regular term insurance plans. There is no paradigm nomenclature. The most commonly used terms are Income Benefit Plan and Income Replacement Term Plans.
Benefits and Advantages of Income Replacement Term Insurance Plans:
The income replacement term insurance plans have the following benefits:
Like the regular term insurance plans, the income replacement insurance plans are not too expensive. The premium charged in these plans is same as that of any regular term plan.
- Enough Time to Plan and Comfort Zone:
It may not be a simpler task, especially for the ones who are not well aware financially, to invest their large corpus in the right channel of investment. Families and dependents are generally used to the idea of assimilating in their monthly expenses within a fixed amount that the wage earner of the family earns that becomes like a comfortable practice.
An income replacement life insurance product makes sure that the family of the policy holder continues to stay in the similar comfort zone for no less than the next one or two decades after the demise of the policy holder. This gives enough time to the family of the insured to plan alternate sources of income or figure out the ways to earn income from the assets that the policy holder has left.
Limitations of the Income Replacement Term Insurance Plan:
Apart from a number of advantages and benefits of income replacement plans, below are the limitations:
- It is too easy to understand the regular Term Insurance Plans as the sum assured is paid to the beneficiary in case of the demise of the policy holder. However, the income replacement plans may be that easy to understand.
- In income replacement insurance cover the payout is spread over several years. Hence, it may be puzzling to understand and make comparison between these plans as you can do for regular term plans.
- Income replacement products can be structured in several ways. For that reason, the buyer might get confused and purchase a plan that is not fully comprehensible.
- A few of these plans come with fancy names that could confuse the buyer.
It completely depends on your particular situation and financial needs and requirements whether you call for only a regular term plan or income replacement plan or both. A financial planner with a handful of experience or a certified investment advisor can help you in planning out your insurance portfolio and figure out the exact plan and numbers.