A paltry price for protection

The low cost of term insurance allows customers to buy adequate life cover. Here are a few things to keep in mind when you go shopping for one.

Babar Zaidi | Print Edition: December 2010

How much would you spend for peace of mind? The kind of assurance that comes from knowing that even if something happened to you, your loved ones will not face any financial difficulty.

If you are around 30 years old and earn about Rs 50,000 a month, you can buy this peace of mind for about Rs 4,250 a year. For less than the price of a soft drink a day, you can be insured for four times your annual income. This is the bare minimum insurance cover that experts recommend.

The implications of this arithmetic is not lost on Gwalior-based Deepak Kumar. The 29-year-old bank executive has no financial dependants right now, but will have one when he marries next year. This is why a term plan figures high on his New Year's shopping list. He already has a Ulip, but the cover offered is so little that you need a magnifying glass to spot it.

"I realise that the Rs 1.5 lakh cover offered by my Ulip is insignificant compared with what I need. I had bought the Ulip to save tax," explains Kumar.

This is the most common reason for buying life insurance. It's about time this mindset changed. In the coming years, Kumar may not get any tax benefit for the Rs 30,000 he shells out every year for an insurance cover of Rs 1.5 lakh.

The new Direct Taxes Code (DTC), which is pending before Parliament and is likely to come into effect from April 2012, may change the rules of the game. Tax deduction will be available only if an insurance plan offers a cover of at least 20 times the annual premium. Not many people share Kumar's eagerness to be on the safe side.

Faridabad-based Shiv Pratap Singh is a software engineer, but he likes skating on thin ice. This 37-yearold sole breadwinner finds it a breeze to service a home loan and a car loan, given his income of Rs 1.5 lakh a month. But ask him how his family (homemaker wife and child) will cope if something happens to him and Singh has no answer.

He has an insurance cover of Rs 9 lakh and outstanding loans worth Rs 7 lakh. This would leave his family with Rs 2 lakh-enough to sustain them for 4-5 months. MONEY TODAY believes Singh needs a cover of at least Rs 60 lakh (see box) to ensure that his family's current lifestyle is maintained and future expenses are taken care of in case of his untimely demise.

Take the case of Ghaziabadbased Mayank Sharma (see box). Two years ago, we analysed his financial portfolio and told him he did not have adequate life cover. Since then, Sharma has bought three term plans that combinedly cover him for Rs 45 lakh. The cost: Rs 20,000 a year. That's equal to the premium he pays for a Ulip and a money-back policy, but which cover him for a piffling Rs 2.5 lakh.

"I bought the Ulip and moneyback policies when I did not understand insurance," says Sharma. Now, he swears by the cost-effectiveness of term plans. Sharma pays just 1.33% of his annual income to get a cover worth three years of income.

We agree that these low-cost covers are the best way to insure yourself. However, here are a few basic things to keep in mind before buying a term insurance plan.

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