| Policy | Annual premium (Rs) | Total term | Paid for | Sum assured (Rs) |
| Komal Jeevan | 7,600 | 18 years | 3 years | 1 lakh |
| Freedom (ING Vysya)* | 25,000 | 10 years | 3 years | 2.5 lakh |
| Freedom (ING Vysya) ** | 25,000 | 10 years | 3 years | 3 lakh |
| * For self ** For wife | ||||
I am 32 years old with an annual income of Rs 3 lakh. I hold three policies (see table) for which I pay Rs 57,600 as premium every year. All policies have completed three years. I have a small family of wife, 3-year-old son and an old father. We live in our own house and have no loans. How much term cover should I take and what should I do with my existing policies?
— Pankaj Chandarana, Pune
As the sole earning member in your family, you need a good life insurance cover. From the information you have given, we find that your existing policies do not provide you with adequate life cover. The good news is that since you own your house and are not paying off any loans, the cover you need will be lower than if you had taken a home or any other loan.
As a rule of thumb, your life cover should ideally be 6 to 7 times your net annual expenses. If your annual income is Rs 3 lakh and annual expenses are Rs 1.5 lakh, your cover should ideally be Rs 9-11 lakh. From this figure, deduct the life cover you hold in your name (Rs 2.5 lakh). You should ideally also take into account all your future needs like your child’s education, marriage, etc, and add the present value of those needs.
The figure you arrive at is the amount of life cover you need for which you can take a term plan. Take a basic term plan (without return of premiums) for the maximum term available to you and compare rates across insurers to get the best deal. At your age, a Rs 10 lakh cover for 30 years will cost you about Rs 4,000 a year. For more details on term plans, see story on page 35.
We would also suggest that you continue with the Komal Jeevan plan in your child’s name. Komal Jeevan is a money-back plan for children from the Life Insurance Corporation (LIC). The policy matures when the child turns 26, while giving the child a regular income from the age of 18.
Since this is a money-back plan, you will incur a significant loss by surrendering it midway, as whatever surrender value factor you would receive will exclude the first year premium. This plan also provides you with a guaranteed addition (on death or on maturity).
The other two policies you hold are unitlinked insurance policies or Ulips. As the initial charges in Ulips are very high, you cannot expect a significant return if you surrender them now.
Moreover, there is a surrender charge if you opt out in the first five years. Your best bet is to continue with this as an insurance plan, and go for a premium holiday if your insurer allows it. This way, the future mortality cost would be adjusted out of your fund corpus and the rest will provide you investment returns, after adjustment of charges.
Use the money saved here to invest in a basket of instruments including mutual funds and equities. Ideally, look for systematic investment plans, which will help you ride over the bottoms and highs, and give you stable returns.
This is an interactive section for investors. Do you have a query regarding your investments? Write to us at letters.moneytoday@intoday.com and we will give a detailed answer.
