Life Insurance – an instrument which is favored by some due to the inherent tax benefits while others endorse the importance of having a life insurance cover. Though life insurance companies and also the regulatory body IRDA (Insurance Regulatory and Development Authority of India https://www.irdai.gov.in) are trying to instill the awareness of life insurance in the minds of the Indian population, they still have a long way to go. To attract customers to buy an insurance plan when there are other attractive investment options available in the market is a mean feat. This is why, IRDA has been making various amendments in its regulations and insurance companies are launching newer and better insurance plans in the market, all with the intention of wooing the investor.
A Monthly Income Plan, a new addition to the long range of life insurance plans, is another plan with a new concept launched by insurers. What these plans are and what they offer is a matter of detailed understanding, and therefore, we thought of explaining it to you.
What are Monthly Income Plans?
The name says it all, doesn’t it? Monthly Income Plans are insurance plans which provide a monthly income to the policyholder besides the regular benefits payable on maturity or death. These plans are also called Guaranteed or Assured Income Plans as the monthly income benefit payable under the plan is guaranteed and is mentioned in the policy brochure and the document. Other than this monthly income feature, the plans are similar to other traditional savings plans offered by life insurance companies.
What are the features of Monthly Income Plans?
Some common features of Monthly Income Plans are mentioned hereunder:
Nature of the plan - Monthly Income Plans are always offered as traditional insurance plans which provide a guaranteed benefit. Unit Linked Plans do not offer the provision of monthly incomes simply because such plans provide the feature of partial withdrawals after the lock-in period of 5 years. Thus, traditional Endowment plans are bestowed with the feature of monthly income provision.
Amount of monthly income - The amount of the income which is paid monthly is fixed beforehand. In fact, the choice of the monthly amount rests with the policyholder who can choose any amount as is required by him. Based on this amount, the premium and the Sum Assured are usually determined. These amounts are fixed and guaranteed and are not linked to market performance. Monthly incomes can also be derived as a percentage of the Sum Assured selected and thus, the choice of the Sum Assured lies with the policyholder who can choose any amount of coverage, within the minimum and the maximum allowable limits, and avail the monthly incomes.
Bonus participation - Monthly Income Plans are usually offered as participating insurance plans which earn bonuses. Simple or compound bonuses may be declared under the plan and these bonuses accumulate over the plan tenure and are payable on maturity or death. Some plans might also pay a component of the accrued bonuses along with the monthly incomes which is comparatively very rare. Interim bonus and terminal bonus are also added in most of the plans. Thus, the provision of additional bonus makes the returns under the plans attractive.
Premium payment - Most of the Monthly Income Plans have a limited premium payment tenure wherein premiums are payable for a limited tenure while the cover continues beyond this tenure. Monthly incomes usually accrue after the premium payment term is completed and continue till the end of the selected plan tenure. Some plans also start paying the monthly incomes during the premium payment tenure itself, thus providing policyholders with a fund to pay subsequent premiums easily. This also ensures plan continuation as policyholders do not face a financial crunch preventing them to continue premium payments under the plan.
Duration of monthly incomes - The monthly income which is payable usually starts after the plan completes a specified period initially. If the insured survives this initial tenure, the incomes start accruing. The period up to which such incomes are paid is usually stretches till the completion of the chosen plan tenure. When the plan matures, the maturity benefit is paid and the incomes also stop. A deviation from this structure is found in certain term insurance plans which pay the death benefit in monthly instalments after the death of the insured.
Insurance Cover - All Monthly Income Plans come with an insurance cover called the Sum Assured. This feature ensures insurance protection and pays a lump sum amount of death benefit in case the insured dies during the specified plan tenure. The best thing about this feature is that the death benefit is not reduced by the monthly incomes already paid out. Thus, the policyholder can enjoy the twin benefits of regular incomes and also a lump sum benefit on his death which can be utilized by the family for meeting any financial obligations.
Nature of monthly incomes - While most plans provide a uniform rate of monthly incomes, some plans might provide the income increasing annually every year at a fixed rate.
These are the most basic features of monthly income plans which are available in the market today. Now let us consider the advantages of these plans which make them a popular choice of investment among investors:
Liquidity – the basic objective of these plans is to provide liquidity to the policyholder by the provision of monthly incomes. Since traditional insurance plans come with a long-term perspective, they are avoided because of their rigid nature of lock-in for such long durations. Monthly Income Plans solve this problem. They also come with long tenures, but the incomes starts 5-10 years after the plan commencement. Thus, liquidity is ensured and the policyholder can utilize the funds generated to meet his monthly financial obligations.
Act as retirement planning tool – since benefits under these plans are provided monthly, they can act as a retirement-oriented investment instrument. Pension plans provide annuity which is subject to taxation while the incomes under these plans are tax-free. Moreover, the corpus under pension plans is compulsorily to be used for receiving annuities while the lump sum benefit under Monthly Income Plans can be put to any use. Thus, these plans can effectively substitute pension plans for retirement planning.
Tax exemption – like other plans of insurance, except pension plans, premiums paid for these plans are exempted from taxation under Section 80C (up to Rs.1.5 lakhs). The maturity or death benefit received and the monthly incomes are also tax-free under Section 10(10D).
Guaranteed benefits – as the incomes are guaranteed, these plans provide a guaranteed source of benefits which is not true in case of monthly income plans of mutual funds. Thus, the policyholder is saved from the volatility of capital markets and can avail assured fixed income every month.
These were the most prominent advantages of a monthly income plan. By now you must have grasped the basic understanding and working of these plans. Now, let us check the features of a Monthly Income Plan of Life Insurance to understand the working of Monthly Income Plans in general.
If you are looking for regular monthly returns from various savings and investing options, you will find many options – like, bank fixed deposits, post office monthly income plans, mutual fund MIP schemes and monthly SWP from mutual funds along with monthly income plans offered by various insurance companies.
Expert financial planners suggest that one should not put all the eggs in one basket! Therefore, when you are looking for getting regular returns in your retirement years the monthly income plans offered by life insurance companies can be one of the good options for the reasons mentioned above.
While it offers tax free fixed monthly returns it also protects you from the market volatility and thus suitable to all kind of investors. Some monthly income plans even allow choosing the amount you wish to receive while buying the insurance plan.
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