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Published in Mint on 16th October, 2017. Written by Abhishek Bondia

We had bought a term insurance 3 years ago with a sum assured of Rs10 lakh. Since then, we have made more investments in mutual funds and the net asset value (NAV) of our units is already more than Rs10 lakh. The premium we spend on insurance can be, perhaps, better utilised towards systematic investment plans (SIPs). Please advise if we should continue or discontinue with the term plan. Also, given our investments, do we really need to buy life insurance?

Shyamala Jain
Don’t mix your investment and protection needs. Term insurance is meant to provide an alternate source of income for your dependents if you die early. The thumb rule is that term insurance should be at least equal to ten times of a person’s income.
The proceeds could be used to settle outstanding obligations such as a mortgage, plan for any lump sum expenditure such as children’s marriage, and creating a corpus for the family.
Given that you have been able to save around Rs10 lakh over 3 years, it is likely that sum assured of Rs10 lakh is not adequate and is a low proportion of your annual income. Instead of discontinuing the current cover, you should enhance the sum assured. Buying an additional term plan may be the best course for you.

I am 35 years old, with two children (3 and 6 years old) and a wife. I work in a private job earning about Rs40,000 a month and don’t have life insurance. Recently I came upon a small inheritance of Rs4 lakh. I hear that insurance should be one of the first financial investments. I want to buy a single premium term policy with this money. What is the maximum sum assured I can get with this amount? Is it better to buy a single premium policy, or should I invest this money somewhere and pay annual premiums for some years.

Given your annual income of around Rs4.8 lakh, you should consider a sum assured of at least Rs50 lakh.
At the age of 35, a single premium term insurance for a sum assured of 50 lakh can be bought for around Rs1.8 lakh. Such an insurance would provide coverage till the age of 75 years. The premium is lower for shorter durations and lower sum assureds.
Buying an annual policy is better than buying a single premium term plan for the following reasons. First, in case of an early death, the premium outgo is for a limited number of years in a regular payment premium plan.
In case of a single premium plan, the outgo is meant for the entire period. If you were to buy a regular premium plan for Rs50 lakh coverage till the age of 75 years, that would cost about Rs9,500 per year and would leave you with a much larger amount of money to invest. Second, a regular premium plan gives you the flexibility to discontinue the plan during the term of the plan. You may do this if premiums on new term plans fall or if you find that you have become financially secure at some stage.