I am 33 years old and earn Rs 12,500 a month. I want to take life insurance cover of Rs 15 lakh for a term of 25 years. Should I invest in a Ulip or should I go for a term insurance plan plus mutual funds?
— Kavindra Salunke, Faridabad
Insurance cover required: Rs 15 lakh Period of cover:25 years Term plan premium: Rs 4,500 a year Ulip premium:Rs 25,000* a year *Bajaj Allianz Unit Gain Plus Gold plan |
You have not identified whether you have any financial dependants like a wife, children or parents. If you do not have any dependants, then you do not need life insurance. You could perhaps, take some kind of accident cover that can protect you in case you get permanently disabled.
You need to assess what your investible surplus is after you pay your rent, utility bills and kitchen expenses. Is there enough cash left for you to purchase any kind of insurance? Keeping in mind your current salary level, you do not need to invest too much in tax saving options under Section 80C.
An investment of Rs 40,000 (including your Provident Fund contribution) will reduce your tax to zero. Assuming that you have disposable income, as well as financial dependants, you need to quantify how much cover you want and how much premium you can afford. That will help you decide on an optimal amount of cover.
A term plan is the cheapest form of insurance. Ulips have their own benefits for an investor who wants to combine risk cover with long-term wealth creation. However, given your income level, you are better off buying a term plan for risk cover and investing through mutual funds.
Moreover, as your insurance and financial needs change, you can get more appropriate insurance coverage. If you buy a term plan now, you might find it easier to exit from it or take additional cover if you need to restructure your insurance coverage.
In comparison, a Ulip can be a tougher instrument to restructure. Due to the higher upfront fees paid, you might find that the net payoff through a Ulip will not be that desirable at the time you decide to restructure your insurance, especially if it happens in the first 5-7 years of your coverage.
| Here is a quick comparison of a mutual fund and a Ulip | |
Mutual fundInvestor free to choose any fund house and any scheme No compulsion to keep investing every year No lock-in period unless it is an ELSS Switching from one fund to another attracts entry load Tax payable on short term capital gains from switching Entry load is 2.5%; recurring charge is 2-2.5% a year No Section 80C tax benefit unless it is ELSS | UlipNot possible to switch fund house or policy Premiums must be paid for at least 3 years Investment locked in for at least 3 years Three or four switches in a year are free All profits from the policy are tax free Initial charge up to 30%; recurring is 1-1.5% a year Tax benefits under Section 80C |
