Monthly Income Plan - A Quick Guide

Have you ever thought what would be your financial source of income your regular source of income suffers a setback due to some mishap? Most of the people think that term insurance well serves the purpose. But here’s the catch, term insurance pays out a lump sum amount in case of death/disability which is, usually, exhausted in meeting the immediate expenses, thus leaving no future funds for the family.

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In contrast, monthly income plans, or MIPs involve paying out the money to the family/nominee as a fixed monthly income over a long period of time which can be up to 25 years.

A Monthly Income Plan is a kind of mutual fund wherein the investment is allocated proportionately between the equity and debt markets in a ratio of 20:80 (approx.). Put simply, it is a debt-oriented mutual fund, the objective of which is to provide the investor with periodic payouts on a monthly basis. Since it is a market-linked product, the returns are not guaranteed; instead, they depend upon the fund performance.

A Monthly income plan is most apt for those who want to assure an alternative source of income as a backup for their regular income. MIPs also work well for those who are looking to have a guaranteed monthly income after retirement. Moreover, a Monthly Income Plan has gained popularity as an ideal investment tool to beat inflation at minimal risk.

The Key Features

MIP boasts of many features that gives it an edge over its conventional alternatives as Bank FDs and and post office Monthly Income Scheme (MIS).

Primarily, the returns yielded by MIP are bigger (11-14%) than that yielded by FDs and MIS (8-9%).

Secondarily, unlike its conventional counterparts, there is no limit on investment made on MIP. There's no entry charge in MIP, but there's an exit charge, which is usually 1.0%. On top of that, there's no lock in period. So, MIPs have a higher liquidity. What's more, MIP also frees the investor of having to keep a watch over the funds or bearing headaches over switching funds.

In the case of MIP, a rise in interest rate causes a fall in NAV and a fall in interest rate causes a rise in NAV. So, the best time to invest in MIP is when the interest rates are high.

MIPs work on an unique mechanism. The declared dividends do not represent the total earnings on funds but just a fraction. The surplus so left is made use of in the future in declaring dividends when there are no substantial earnings on funds.

Types of MIP

Basically, Monthly Income Plans are of two types:

(a) Dividend Based MIP – Monthly payouts are made out in the form of dividends. The dividends earned by MIP are tax-free for the investor. But here's the catch, the dividend amount that the investors ends up getting is actually the earned dividend less 14% dividend distribution tax.

(b) Growth Based MIP – Here, the profit made on the capital keeps getting added to the capital. However the money is not paid out to the investor at periodic intervals, instead it is paid along with the capital when the units are redeemed.

Who should buy it?

MIPs are for those risk averse investors who like to stay somewhere in between the safe zone of debt funds and the risk zone of equity funds. These are usually the reserved investors who wouldn't mind taking a little risk on their portfolio.

MIPs are most suited to retired persons or those who on the verge of retirement and looking to invest their money somewhere safe that could guarantee a fixed periodic return. It also works well for the new entrants in mutual funds, ready to take their first humble steps in equity exposure.

MIPs

Being a dynamic investment option, there's no Monthly Income Plan that stays at top all the time. However, there are a few MIPs that have performed consistently well, yielding a substantial return in the range of 10-13% for the last 5 years.

Here’s How It Works

The policyholder pays the premium regularly through the premium payment term. At the end of the term, if the policyholder survives, he gets a regular monthly income till the end of the policy tenure, as specified in the policy (note: in case of MIPs policy tenure is longer than premium payment term). When the policy tenure ends, the insured gets terminal bonus and simple reversionary bonus. With the payment of these bonuses, the monthly income plan terminates.

However, if the policyholder dies during the policy tenure, his nominee becomes entitled to get the regular monthly income as well as the premiums paid by the insured up till death. At the end of the tenure, the nominee is paid out terminal bonus and simple reversionary bonus.

Example

Mr. Sharma has an annual term insurance policy for 10 years tenure. He pays a premium every year. If he dies within this tenure, his nominee gets the death benefit. So, on a premium payment term of 10 years, Mr Sharma gets a life cover for 10 years.

Mr. Verma who’s a bit smarter than Mr. Sharma opts for a Monthly Income Plan with a premium payment term of 10 years. The tenure of the policy is 20 years. He pays a regular premium for up to 10 years after which he starts to get a fixed monthly income for the next 10 years. However, if he dies within the tenure, even after the premium payment term, his nominee gets the benefit. So, on a premium payment term of 10 years, Mr. Verma gets a life cover for 20 years.

Perks of MIPs

MIPs give you the option to get valuable riders added to your plan. Riders add substantial value to the basic cover at a nominal additional premium. The best thing about monthly income plans is that you get the life cover even beyond the premium term as illustrated in the above example. It’s a win-win policy. The insured either gets the death benefit or the survival benefit as the case may be. The returns from a monthly income plan is fixed and guaranteed as it is untouched by market fluctuations. The insured also gets terminal bonus and simple reversionary bonus.

What’s not so Good?

The insured needs to incur surrender charges if he chooses to withdraw the amount before the policy term. Moreover, term opted at the time of buying the policy can’t be changed later. And the worst of all, the fixed monthly income is taxable.

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer. Tax benefit is subject to changes in tax laws. *Standard T&C Apply

˜Top 5 plans based on annualized premium, for bookings made in the first 6 months of FY 24-25. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-04-2025

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ

^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).

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