Published in Mint on, Jan 22 2013, Written by Kapil Mehta
I am 30 years old and my mother and wife are dependant on me. I want to buy a life insurance policy. What are the important questions that I need to ask an insurer before buying a policy? Also I want to buy a policy for my wife. Should we buy a joint policy? She is working but has no dependants.
—Hemant Mishra
A life insurance policy can meet four financial needs. In order of priority, these are financial security for the family if a person dies, forced savings over the years, investment returns and tax savings.
Begin with the first priority and purchase a term insurance for your wife and yourself. Buy separate policies and select a sum assured that is about 10 times each person’s annual income. At 30 years, Rs.50 lakh of sum assured will cost about Rs.8,000 per annum for a 30-year term.
Next, take up forced savings. The reason this is a priority is that most of us are not disciplined about savings. Purchasing a financial product that requires periodic investment is a good way to do that. Evaluate equity-oriented unit-linked insurance plans (Ulips) and systematic mutual fund investment plans to meet this objective. The two options can also help you save tax.
I have a car loan of Rs.5 lakh, which will continue till March 2017. Since I do not want my wife to repay if something were to happen to me, will taking a personal accident cover make sense? What all will it cover?
—Krishna Kishore
A personal accident cover is insufficient because it only covers death by accident. Premature death can also take place because of a non-accidental health condition. You need to buy term insurance that covers death by any cause.
You could buy term insurance with a sum assured of Rs.5 lakh for 10 years. However, if you are buying term insurance, go for a larger cover. For a 36-year-old, a Rs.5 lakh sum assured will cost Rs.3,000 per year. By paying Rs.2,000 more, you can get Rs.15 lakh of insurance. That is an intelligent upgrade to do.
I am 54 years old and my agent has advised me to buy a Ulip. I have no dependants and my children take care of my expenses. I want to invest to build a corpus to go for holidays. Can Ulips give guaranteed returns?
—Shyamalan
Like you, I love holidays but I always find myself planning them just a few months in advance. If you plan to travel sometime over the next year or so, then no life insurance product will help. Life insurance is relevant only for events that are at least five or more years away.
Ulips generally do not give guaranteed returns. The few that do, will deliver guarantees too low to afford you a good holiday. If you have a one- to two-year investment horizon, then you are probably best off investing in debt mutual funds or fixed deposits.
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