What are income replacement term plans? All you need to know

An income replacement term plan is a kind of term insurance whereby two portions of the death benefit are distributed. Unlike a typical term plan, the second part of this sum is paid to the beneficiary on regular intervals while the first is paid as a lumpsum. Income replacement is in the form of the monthly pay that the nominee gets after the death of the life insured, from a fixed proportion of the death benefit. Although this could not mean that all possible future income will be replaced, an income replacement term plan guarantees a consistent flow of money for the beneficiaries over a long period of time.

What does an Income Replacement Term Plan offer as benefits?

An Income Replacement Term Plan offers the following advantages:

• Income Replacement

Policyholders at the time of policy purchase have the choice on how death benefits of the policy are distributed. A portion of the death benefits can be paid to the nominee(s) as a lump-sum payment; the rest will be paid out on a regular basis to replace lost future income resulting from the death of the life insured. Alternatively, you could decide to act just as an income replacement and pay the death benefits of the policy just monthly. The policyholder's choice lets this customization be followed.

• Tax Advantages

Like other term insurance policies, the premiums paid for this kind of life insurance policy are qualified for tax deduction benefits u/s 80C of the Income Tax Act, 1961. • Financial Protection During Policy Term; also, the death benefits obtained as regular income from these plans are tax free per guidelines of Section 10(10D) of the Income Tax Act.

These plans, with their set policy term, are protection plans. Therefore, the main emphasis of an income replacement term plan is to give the policy beneficiary financial protection so that they may reach important life goals like dependent children's education, marriage, vacations, etc, without compromising their lifestyle, while the plan is in effect.

Why should you have an Income Replacement Term Plan?

Going forward with an Income Replacement Term Plan is most definitely a good choice if you wish to give your family a consistent income paid out over time rather than a lump-sum pay-off following your death.

This guarantees that your family has a consistent income to run daily operations and, should a lump-sum payment be paid out, the larger payout can be retained and/or used for future needs or crises.

Depending on the corpus available, you can also choose the pay-off period as per the needs of your family so that significant events like completion of higher education, loan pay-off or marriage of children is carried out without impacting the lifestyle needs of your loved ones.

An Income Replacement Term Plan is best suited for whom?

Although everyone should have a financial plan including a term insurance plan that offers income replacement, below are a few groups of people who should absolutely give this choice some thought.

• Those with Dependents

If one wants to guarantee the financial future of their dependents in case of an unfortunate eventuality, such people should think about selecting an income replacement term plan. One should keep in mind, though, that this kind of life insurance usually does not include survival or maturity benefits. 

• Those who are sole earners

Choosing a term plan with a consistent death benefit pay-out is absolutely appropriate in case you are the only earner in your family. This will help you to relax knowing that, should your death be unannounced, your loved ones will be financially stable and have access to regular income.

• Individuals who are single parents

An income replacement term insurance plan can be quite helpful for such people, should your untimely death affect the child/children. This plan's main emphasis should be on making sure your children are financially stable and positioned to reach their career and personal goals since you are the only provider for your family.

• People Having Significant Outstanding Debts

If you have large outstanding debt—such as a house loan—you should absolutely give a term plan with income replacement some thought. This will guarantee that your family can maintain the regular EMI payments even in the case of your untimely death so that they may keep enjoying the advantages of the asset(s) you have bought for them.

What further advantages exist from income replacement term insurance plans?

One should also consider the following as some other advantages of these schemes:

• Mental peace for dependents and life-insured

• Flexibility to customise the plan depending on o Pay-out period – this enables you to select a suitable period over which the regular income benefits of the plan will be paid out

• Choice to have lump sum and regular pay-off customising of death benefits instead of selecting only one of the alternatives. This guarantees the recipients even more adaptability.
  
  

Are mutual fund SWPs similar to income replacement term plans?

One aspect common between mutual fund SWPs and income replacement term plans is the inflow of monthly cash flow. However, while an income replacement term plan does so only upon the insured’s demise, you can yourself plan the mutual fund SWPs, especially by utilizing the swp mutual fund calculator tool, to get a monthly inflow from your accumulated corpus, as per your financial requirements.

Simply put, systematic withdrawal plans (SWP) are the opposite of SIPs. SWPs are a facility designed for investors allowing regular, fixed withdrawals from a mutual fund scheme. You decide on the frequency and amount of withdrawal. You could also decide to simply take back the gains on your investment, leaving your invested capital whole. Units from your portfolio are sold at the scheduled date, and the money is transferred to your account.

Also, just like SIP online calculators, you can utilize the SWP mutual fund calculator to understand how much you would get as monthly inflow over a period of time when you begin withdrawing from your invested corpus.