- Date : 08/08/2022
- Read: 6 mins
Death can strike anyone, anytime. While we cannot do anything about the uncertain nature of life, we can protect our family against the financial consequences by choosing a salary protection insurance plan.
During the COVID-19 pandemic, lakhs of people died. The pandemic served to highlight the uncertain nature of life. In India, life insurance penetration is less than 5%. In many cases, those who succumbed to COVID-19 were the only earning members of their families. After their demise, their family members are struggling for survival since (in many cases) the family breadwinner did not have a life insurance cover.
This article focuses on salary protection insurance: what it is and how it can take care of your financial liabilities and responsibilities after your death.
The importance of salary protection insurance
Let us consider an example to understand the need and importance of salary protection insurance. Manish is a 35-year-old individual. He is married to Tina, and they have a 3-year-old son Ashish. Tina is a housewife. Manish’s parents are retired and dependent on him. Manish has a home loan and a car loan. One day, Manish met with an unfortunate road accident and died.
Now, ponder on the following questions:
- How will Manish’s family manage their regular day-to-day expenses?
- Who will pay the family’s home loan and car loan EMI?
- How will the family manage Ashish’s primary and higher education?
- How can Tina plan for her old age?
Manish was the only earning person in the family. So, the family's survival is at stake after his death. This is where salary protection insurance comes into the picture for the family's financial security.
Also Read: A Simple Guide To Life Insurance
What is salary protection policy?
A salary protection policy provides a monthly income to the insured’s family in the event of the policyholder's death during the policy tenure. The monthly income is paid from the time of the life insured’s demise for the remaining policy tenure. Some plans offer the flexibility to choose a combination of lumpsum payment on death and monthly income after that. Some policies increase the monthly income at a specified compounded rate yearly to take care of inflation.
A salary protection policy is also known as an income protection insurance plan. The main objective of an income protection insurance plan is to replace the life insured’s monthly income in the event of their death during the plan tenure. The life insured has to pay an insurance premium regularly. Basically, it is a type of term insurance policy.
How does an income protection insurance plan work?
- Select the monthly income: At the time of purchasing the plan, the life insured has to select the monthly income amount that the family members will receive in the event of their death. The monthly income amount selected can be equal to or lower than the current salary amount being received by the life insured.
- Select the policy term: The life insured has to select the policy term and the premium payment term. Based on the above details and personal details (age, gender, smoking status) of the life insured, the premium is calculated.
- Avail of death benefit: The life insured will have to pay the premium as per the premium payment term chosen. If the life insured dies during the plan tenure, the insurance company will pay the family based on the death benefit chosen at the time of plan purchase. The insurance company will pay the monthly income for the remaining policy tenure.
Features of the salary protection plan
A salary protection plan comes with a couple of interesting features:
1) Increasing one's monthly income
Some plans increase the monthly income at a specified compounding rate annually. For example, the Kotak Income Protection Plan increases the monthly income by 6% p.a., compounding each policy anniversary.
For instance, Sita has purchased the Kotak Income Protection Plan for a tenure of 20 years. She opted for a monthly income of Rs 50,000, increasing at a 6% p.a. compounding rate. Tragically, Sita dies in the 7th year. The death benefit payable to Sita’s family will be calculated as follows:
Chart: Lumpsum and monthly payout on death
As seen in the above chart, Sita opted for a monthly income of Rs 50,000, which will compound at 6% p.a. Sita dies in the 7th year of the policy. So, in the 7th year, the monthly income would be Rs 70,926. Her family will receive a lumpsum amount of Rs 8,71,112 (Rs 70,926 × 12 months). From the next policy anniversary, Sita’s family will receive a monthly income of Rs 75,182. The monthly income will continue to increase at a compounded rate of 6% p.a. for the duration of the policy tenure (20 years).
2) Guaranteed payout period
In the above example, we see that Sita passed away in the 7th year. So, her family will get a one-time lumpsum benefit and a monthly income for 13 years. However, what if Sita had died in the 20th year (last year) of policy tenure? In that case, her family will receive only the one-time lumpsum benefit. There will be no monthly income. The policy will not serve much purpose with just a one-time lumpsum benefit equivalent to one year's income. It may take a longer time for Sita's family to adjust to the situation and earn an income source.
To address this concern, some policies have a minimum guaranteed payout period. For example, the Kotak Income Protection Plan has a minimum guaranteed payout period of 5 years. In the above scenario, if Sita dies in the last year of the policy, the insurance company will pay her family a one-time lumpsum amount (equivalent to one year's income) and a monthly income for five years. So, the policy pays a monthly income for the balance policy term or five years, whichever is greater.
Salary protection insurance plan: Plan for the best and be prepared for the worst
Every working person should go for a salary protection insurance plan. If the individual survives the entire plan tenure, they can meet their financial liabilities and responsibilities with their actual monthly salary income. However, if they meet with an untimely death, a salary protection insurance plan will replace their monthly income for the family. So, a salary protection insurance plan is a backup of your monthly income for your family in the event of your death.
To sum up, you should buy a salary protection insurance plan and plan for the best - and, at the same time, be prepared for the worst.