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Published in Mint on Feb 02, 2017, Written by Abhishek Bondia
How do I lower the cost of buying life insurance? I am 28 years old and earn Rs20,000 per month. I am the sole earner in my family and can only spare around Rs2,000-3,000 a month for insurance, which I now consider to be an important financial product for my family’s future.

—Ramesh Kathuria
The most critical life insurance for you is term coverage. Your budget is sufficient to buy appropriate coverage. I recommend you take a sum assured of Rs25 lakh. It will cost you around Rs2,500 annually for a 30-year term.
In case you die, the term insurance will pay the sum assured to your nominee. The objective of term insurance is to ensure that dependents can continue to maintain their current standard of living in case of the bread earner’s untimely death.
Do note that term insurance is not an investment instrument, so it has no maturity or surrender value. To invest your surplus income, you may consider other investment avenues such as bank fixed deposits or mutual funds.

How do I convert my existing paper policy into electronic form? Will it cost me any money?

—Kamal Mehta
You need to apply to your insurer for an e-insurance account and ask to dematerialize your existing policy. You would need to choose a repository from the approved list. Your e-insurance account will have a unique account number, a unique login ID, and a password. You can then access your policies online from the e-insurance account. You don’t have to pay to open an e-insurance account. There are no charges to convert the existing policies to the dematerialized form. I recommend that you convert your policies.

Why is there a demarcation in getting a medical test done for lower and higher sums assured for term plans?

—Rohan Singh
 Whenever insurers underwrite a life insurance policy, they are taking the risk of an untimely or early death of an individual. The risk increases if the person is suffering from a medical problem. So, insurers insist on a medical check-up before policy issuance, to identify and filter the risks. Insurers prescribe a greater number of tests for higher sums assured and age because the risks are highest in these categories.
The demarcation of a number of tests is primarily driven by prior experience and costings. At lower sums assured, the cost of some tests may be relatively high. In such cases, insurers make do with limited information.

My wife has an irregular stream of income. She wants to buy a life insurance policy. How should we decide on the amount of sum insured when buying a policy for her?

—Harmeet Lamba
Generally one considers the current annual income of an individual to fix the sum assured for life insurance. In case her annual income varies, you may want to consider the average annual income of the last 3 years. Insurers ask for the last 3 years of income tax returns essentially to establish this. You should then consider a sum assured that is equal to 10 times this average annual income.

I am 30 years old and looking to invest Rs1 lakh annually for tax planning, in a manner that the returns are better than bank fixed deposit returns. Would you recommend an endowment plan or a unit-linked insurance plan (Ulip)?

—Rashika Jha
Between endowment and Ulips, I recommend you consider the latter. Average endowment plans deliver a return of 4-5%, which is lower than bank fixed deposit returns. The charge structure in Ulips is significantly lower than the in-built charges of a typical endowment plan. So, Ulips can deliver higher returns over the long term, especially if you select an equity-oriented fund.