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What is a Passive Income? Why should you Use it to Buy a Term Plan?

dateKnowledge Centre Team dateMarch 12, 2021 views156 Views
What is a Passive Income? Why should you Use it to Buy a Term Plan?

Passive income or income from investments is not just a dream; it is a necessary goal for almost everyone who has an income from a single profession. It is preconceived notion that once you have a secondary source of income, you no longer need to invest your money.

However, will it work for every situation? Is there a possibility that a term insurance can help you to secure your life goals?

At least it doesn’t cost to consider, especially when you can secure the insurance at a nominal cost. But before we dwell on the benefits of a term insurance, let's understand the meaning of passive income.

What is Passive Income?

Passive income, as the name suggests, is an income that you can generate without having to work for it. So, it means that you are no longer heading to the office or business every day and still receiving enough money to:

  • Look after your regular needs
  • Look after your dependent’s needs
  • Take care of the future financial goals

The usual way of generating this kind of passive income is to have a large investment corpus allocated in income-generating assets. Most popular income assets could be blue-chip equity stocks, monthly income plans, pension plans, real estate and fixed income investments.

In a way, you have enough wealth that you do not need to work to save more money. However, your income from this wealth will depend on the ongoing rate of return and many other economic factors. This will also mean that you may have to be flexible with your monthly budgets.

Advantage of Passive Income

Passive income offers a great advantage to you and your family which employment doesn’t offer – “continuity”. Your passive income is not dependent on your efforts (at least not entirely). So, even if you are no longer in the picture the income will continue.

Thus, your family doesn’t have to worry about the income even if you meet the ultimate fate before your children are financially independent.

However, the assumption that the passive income does not depend on you would be like saying, ‘your financial decisions did not affect enabling the income.’

So, it would be wrong to assume that the passive income will not be affected after you are not there to manage it. It is only possible if your surviving family members are equally financially savvy and can decide the following regularly:

Need for Term Insurance

Still, feel term insurance is unnecessary? Term insurance doesn’t just provide a supporting wall until your dependents can stand on their feet financially. Term insurance also helps your family with other important financial decisions.

Meeting the Large Financial Goals

Some of the most important financial decisions are when you need to meet a large financial goal. Without you, your family will have to depend on the wealth which is generating an income for them. If they use this wealth to meet big goals like the child’s higher education and marriage, the family income is bound to take a hit.

Looking after Regular Living Costs

The family needs money regularly, especially every month, to look after the regular living expenses. Without a long-term and regular income support, the surviving family may end up compromising on their lifestyle.

Additionally, if they need regular income support for a long time, they will also face the impact of inflation on their necessary expenses.

In such a scenario you cannot rely on the passed on estate to generate enough passive income for filling in the gaps.

How Does a Term Plan Help with these Challenges?

A term insurance can help you resolve multiple petty issues related to expenses and money. For example, term insurance helps you and your family in the following ways:

  • Helps secure the life of your family members
  • May help your children at a later stage of life in their education and marriage
  • Takes care of wealth transfer costs
  • Keeps your accumulated wealth intact
  • Considers inflation by allowing you to increase the sum assured with changing life stages

Your family will have enough time to make better decisions with your existing wealth to preserve it and use it prudently. Additionally, the lump sum amount can help them save for their future goals; pay out the debts and liabilities.

A standard term insurance plan will expire the moment you survive the policy term. However, if you use a whole life term insurance plan, you can continue the same life cover till the age of 99.

If you survive till the age of 99, you receive the plan’s benefit amount. But even in case of your natural death before the age of 99, your family will receive the benefit amount. Not, to mention the plan’s critical illness cover. This will pay the sum assured if you are diagnosed with a dreaded disease like cancer.

So, even if you have good enough wealth to provide adequate income to your family, term insurance will still make their life a lot safer and sorted, financially.

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Frequently Asked Questions (FAQs) for Term Insurance

This being a term plan doesn't offer any payout after maturity or expiration date.

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 70 years of age.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly.

If your key purpose is to give your Family financial protection, go for the term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, a term plan pays a part of the sum insured to treat your disease.

Term insurance riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term policy remains active until the expiration date.
  • Income Rider: The rider ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to ask while buying Term Insurance?

  1. 1. Amount of premium you have to pay based on your age, habits, education, and monthly income
  2. 2. The total number of benefits covered in the term plan. Do they include benefits that you care about the most?
  3. 3. How to save money on tax if you pay for the term plan?
  4. 4. Do they offer regular income options?
  5. 5. Can you change the coverage and premium in the future?
  6. 6. Does the claim consider valid if death occurs outside India?
  7. 7. Which kind of death is not covered by insurance?
  8. 8. Can NRIs take term insurance? If yes, what are the conditions?
  9. 9. Does the term insurance plan have a cash value if you decide to cancel the policy?
  10. 10. Under what circumstances can a term insurance plan be cancelled?
  11. 11. Can I pay the premiums online or make electronic payments?
  12. 12. What will happen to the term plan if the life assured starts smoking after purchasing the policy?
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