Questions of cover

There has been a spate of queries on life insurance, one of the most crucial financial products. We answer three instructive ones.

Print Edition: December 13, 2007

Maximum cover

Q. What is the maximum life insurance cover that an individual can take?

A. Few people enjoy thinking about the inevitability of death. But if you have financial dependants, this is something you must consider.

The amount of insurance you take should be driven by your earning ability and the financial needs of your dependents that will need to be fulfilled in your absence.

Age (years)Annual income (Rs/lakh)Max cover (Rs/crore)
Above 50151.5

Although there is no upper limit on the life insurance cover that an individual can take, insurers cap the amount of insurance to avoid the risk of over-insurance.

Insurers usually allow a cover of up to 20 times the annual income of a person who falls in the age group of 20-35 years. This drops to 15 times the annual income of 35-50-yearolds, and up to 10 times the income of those above 50 years.

Insurers exercise their judgement so that the sum insured is not unreasonably large when compared to the policyholder’s financial status and earning capacity.

Insurance is basically repayment for a loss that’s incurred, and there are checks in place to curb any element of profit-making.

It is for this very reason that though suicide is covered, it comes into effect only after one year of the policy being in force.

Before issuing you a new policy, most insurance companies insist that you share existing policy details to check on the value of cover that you may already have.

Tax benefits

Q. I am 27 years old, unmarried and will soon be taking up my first job. I want to buy a life insurance policy that will offer me income tax benefits along with some returns from time to time. What are the options available?

- Sivaji Saha, Agartala

A. Above all else, life insurance is meant as protection. Assuming you have no dependents (being unmarried), you may be still some years away from assessing your pure life insurance needs.

However, the type of insurance plan that comes closest to meeting your needs is a with-profit endowment (money back) type of plan. These policies offer tax deduction under Section 80C on the premium paid.

Further, they earn you returns on the investment component of your premium. Any insurer will explain how these policies work (or read MONEY TODAY issue dated 18 October). You could also consider a Ulip option of a money back policy to benefit from disciplined long-term investing with adequate protection.

Required insurance

Q. I am 33 years old and earn Rs 11,000 a month.There is no provision of pension in my job. I have five life insurance policies that together are worth Rs 5 lakh, with a combined annual premium of Rs 30,000. Do I need any more policies?

- Nirmalya Sen, Kolkata

A. Insurance requirements vary from individual to individual. However, one rule of thumb is that the sum insured should be equal to an amount, which, if invested, should earn a regular income for the dependants of the insured.

This income should be sufficient for them to maintain the lifestyle they are used to. From this sum, you can reduce the savings which you already possess. A higher sum insured will also mean a higher premium.

Therefore, if you need further life insurance, it would be better if you opt for a pure risk term policy, which will give you higher cover at a much lower cost.

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