Can a Term Plan be the Substitute for a Retirement Plan?

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Can a Term Plan be the Substitute for a Retirement Plan?

Term Insurance Quote
  • 30th Nov 2021
  • 427

Can a Term Plan be the Substitute for a Retirement Plan?


It is as important to maintain a steady income source as it is to secure your family’s future. While the latter can be achieved by a term plan, you need a retirement plan for the former. So, can you substitute one for the other? Find out in this post.


Term plansare the traditional insurance contracts that provide a life cover. You can use it to safeguard the future of your family. The sum assured is paid to the beneficiary if the policyholder dies within the policy tenure.

Obviously, it makes things easy for your family. But, what about your expenses. Life doesn’t end with retirement. You will mostly need a regular income to lead a prosperous life post-retirement.

What is a Retirement Plan?

To meet the rising costs of living and medical expenses, you need to maintain a steady flow of funds post-retirement. The same is ensured by a retirement plan, a.k.a. a pension plan.

You can invest in this plan in the form of regular premiums or a single premium as per your convenience. Once the policy tenure ends, you start receiving a monthly pension from the scheme for your life. As a result, you can enjoy a more stable life and maintain your living standard.

Why do you need a Retirement Plan?

Tapping into a retirement plan can prove to be a game-changer. Here are the reasons you should purchase a retirement plan even if you have a term plan.

Monthly Income

The salaried middle-class is largely dependent on the monthly salary to meet daily expenses. But it isn’t easy to maintain a regular flow of funds after you retire. The best feature of a retirement plan is that the monthly pensions can support your family’s expenses even after you retire.

Tax Benefits

Section 80CCC: Investment made in a retirement plan is allowed as a deduction from the total taxable income up to Rs. 1.50 lakhs every year. This can help you reduce your slab rates for tax calculations.

Section 10(10A): The commuted pension (1/3rd of the total corpus) that you can withdraw after the policy matures is also exempt from taxation.

Monthly Pension: You are liable to pay taxes at normal slab rates on the monthly pension that you receive.

Product Variants:

As per your need, you can invest in a deferred annuity plan or an immediate annuity plan.

Deferred Annuity: You can choose to invest by paying regular premiums or by paying a one-time premium. As soon as the policy matures, you start receiving monthly income.

Immediate Annuity:Its features are like a reverse-mortgage plan. You need to pay a one-time premium, and your monthly pension starts immediately. The pension continues for the entire policy term.

(Quick Bite: The entire premium paid for an immediate annuity is allowed as a tax deduction. Hence, the cap of Rs. 1.50 lakh is not applicable on them).

ULIPs (Unit-Linked Insurance Plans): Unlike the regular retirement plans that invest in debt, these plans focus more on equity investments. Their purpose is to build a sizeable corpus by the end of the policy term. It can be highly risky to invest in these funds. Hence, ULIPs may not suit risk-averse investors.

Building a Corpus:

Just like an SIP where you make regular investments to build a huge corpus, the regular premiums under a retirement plan can help you build a sizeable corpus. Even if you pay a one-time premium under a retirement plan, this amount is invested in debt and equity markets. The returns are reinvested until maturity. Hence, they generate a compounding effect.

The Verdict

The purpose and features of a term plan and a retirement plan are different. Hence, they cannot be substitutes for retirement planning. While you can purchase a retirement plan to make your post-retirement life financially stable, a term plan will help give financial protection to your family.

- A Consumer Education Initiative series by Kotak Life

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