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How salary protection insurance can help you

Here is a new feature that most life insurers now offer: salary protection insurance. This is a term insurance policy that typically offers a regular income payout option along with a lump sum payment and is also known as income protection insurance.

While opting for such a term insurance policy, you can choose how to divide the total sum assured amount between the two components (regular income and lump sum) at the time of buying the policy. Those who are not investment-savvy or want to choose lower but guaranteed returns can opt for the term policy with a regular income payout option.

Buyers, however, must know that it is a term policy without any maturity benefits. Only the nominee receives an assured death benefit—a lump sum amount—in the case of the policyholder’s demise.

Akshay Dhand, the Appointed Actuary at Canara HSBC Life Insurance, said as per the terms of the salary insurance policy, regular payments are made to a nominee after the death of the insured for a given number of years.

This is basically a term plan with regular payouts. “This may, however, not appeal to some buyers as the conversion rate offered by the insurer may not be very attractive, considering the guarantees involved,” added Dhand.

How this policy works

When you buy a salary insurance or income protection term insurance policy, you have to select the monthly income you want to provide to your family member. It can be less than or equal to your current monthly take-home income.

After that, you must select the policy and the premium payment term. For instance, at the age of 30 (for a non-smoker), you can buy a policy for 15 years for a regular premium payment term.

The insurer will decide on the percentage increase in the chosen monthly income by you. For instance, the insurer may offer you a yearly compounded increase of 6% on this income. This means that every policy year, the monthly amount will be 106% of the previous year’s monthly income.

Let’s say that you opted for a monthly income of ₹50,000 when buying the policy. In the second year of the policy, this monthly income will increase to ₹53,000, and thereafter to ₹56,180 the next year, and so on.

Now, let’s assume the case of the policyholder’s unfortunate demise at the beginning of the fifth policy year. The nominee will get the assured death benefits of ₹7.6 lakh and an increased monthly income of ₹63,124.

(Assured death benefit = 12 multiplied by the increased monthly income in fifth policy year = 12 X 63,124 = ₹757,488) . The nominee will continue to get the increased monthly income every year for the remaining term of the policy, subject to terms and conditions laid by the insurer.

Rakesh Goyal, director of Probus Insurance Broker, said, “Policyholders should understand that this is a term plan, and salary protection insurance safeguards their family members in case of their unfortunate demise. Such plans offer family members of the deceased a regular income payout option and the lump-sum payment. This will ensure that family members get a monthly income which they can use to continue with their existing lifestyle, spend money on their children’s education or marriages.”

Mint take

You need to be cautious while opting for such policies as insurers can also sell other variants of life insurance policies in the name of salary insurance.

Term policies that come with critical illness, disability, and even loss of employment cover benefits can also provide you with a regular income in case of unforeseen events. So, if any mishap happens, the nominee can also get a regular income for a longer period compared to buying a salary insurance term policy, by investing the money wisely.

However, in such a case, the nominee must devise a meticulous plan to use the claim amount carefully after consulting a financial adviser.

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