Can 'income protection' term insurance policies bolster your loved ones’ safety net?

Why life insurance companies are offering 'income protection' term insurance policies

There’s a reason why our work forms such a significant part of our lives—it not only gives us a sense of purpose but also a regular stream of income that sustains our lives and of those who depend on us.

However, in the case of a breadwinner's untimely death, her family has to grapple with the financial setback due this earnings flow drying up, in addition to the irreparable emotional loss. In most cases, her income that the family is banking on abruptly ends and leaves the dependents struggling to meet ongoing expenses and maintain their financial security. The impact of one such event often overturns the financial security of an entire family.

To protect against such scenarios, term insurance serves as a crucial safety net. While it safeguards your family financially, the nature of payment in term insurance is traditionally a lump-sum payout. So, the regular inflow of money is suddenly replaced by a huge amount. However, families are often not adept at managing such a large sum of money all at once. This can lead to the risk of overspending or poor investment decisions, leading to a rapid depletion of funds. To address this problem, some insurance companies have introduced a clutch of ‘income protection’ plans in recent months.

Also read: Want to take out a life insurance policy? Here are the term plans on offer

Regular payouts instead of lump-sum claim settlement

Instead of a one-time payout, they provide a steady income stream in case of the unfortunate death of the policyholder. This ensures that despite losing the primary earner, the family continues to receive a regular income to cover living expenses, pay bills, and meet other financial needs. These plans are designed to resemble—and replace—the policyholder’s salary.

These plans also come with an inflation-adjusted feature, which increases the payout at a compounding 5 percent annual rate. This ensures that just like your income, the payout can also help one keep pace with rising costs over time. The inflation-adjusted variant can increase the income up to 1.5 times the initial payout amount.

Additionally, some versions of these plans come with specific add-ons to support aging parents. By opting for these add-ons, the policyholder ensures that parents receive a monthly income, while a lump sum is paid to the nominee upon the policyholder’s death. This provides financial security for elderly relatives and reduces their dependence on the extended family or anyone else.

Also read: Why a pure term plan + MF works better than traditional insurance policies

Are the benefits worthwhile?

The objective of these plans is to provide a steady income stream to your family in your absence. Instead of managing a large, one-time payout, your family receives regular payouts just like a salary. Then, the annual increment to combat inflation (capped at 1.5 times your salary) adds an additional layer of financial safety. These plans enjoy the same tax benefits as a regular term plan, so the premium paid as well as the income provided come with tax exemption.

For example, a 30-year-old individual opting for a plan that provides an annual income of Rs 10 lakh (tax-free) would pay a monthly premium of Rs 1,517. In the event of the policyholder's death, the nominee would receive Rs 10 lakh annually for 40 years, resulting in a total payout of Rs 4 crore. The premium in this case is similar to what one would pay for a regular term plan offering Rs 1.2 crore in coverage. Some insurers are also offering special discounts for salaried individuals, women policyholders, and those who purchase the policy online.

These income protection policies aim to address a critical gap in the market. By receiving a regular income, families can manage their finances more effectively and maintain their standard of living without major adjustments.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.