I am a 40-year-old doctor with my wife and 13-year-old son as dependents. My annual income tax return is Rs 3.6 lakh. I have three term plans of Rs 10 lakh each from ICICI Prudential Life, HDFC Life and Kotak Life. I also have a term plan for Rs 50 lakh from Kotak, LIC endowment for Rs 1 lakh and 5 lakh, besides a Ulip from Birla Sun Life for Rs 16.39 lakh. Do I need more insurance? I am planning to surrender the three Rs 10 lakh policies and continue the rest. How much additional cover can I take with this tax return, without the risk of being denied a claim for over insurance? I have not declared the existence of all the policies to any insurer. Can it be now done? -Bharat Rastogi
The purpose of life insurance is to allow your financial dependents to maintain the lifestyle till such time that they can start earning on their own, despite your absence. It is for this reason that most life insurance needs calculators will throw up the amount of insurance you need based on the sum that would take to replace all of your income for 20 years or longer.
You pay Rs 3.6 lakh as tax every year, which amounts to your annual income being Rs 12 lakh, thus falling under 30 per cent tax slab. Currently, you have insurance cover for Rs 1.02 crore, which will last for 12 years at least, if your entire post tax income is spent without any savings. The money may last longer when your existing savings and investments are taken into account. However, the impact of inflation, changing lifestyle and rising costs will also come into effect when arriving at the sum that will be apt to meet your financial dependents’ goals in your absence. It is for this reason that life insurance need is not a one-time exercise and calls for frequent assessment.
Seven life insurance policies is one too many. Unlike mutual fund investments where portfolio diversification is desired, life insurance portfolio should ideally have only term plans; that too from as few insurers as possible. The policy benefit with all term plans is the same – there is no maturity benefit as the policy pays out only death claims.
When buying a new life insurance policy, it is mandatory that you declare your existing life insurance plans. This is desired to check insurance fraud. Insurers offer a policy depending on the prospect’s age, income, lifestyle and other factors. This helps them in assessing the maximum economic value to an independent’s life. Any sum above this value amounts to foul play. There have been instances wherein insurance has been bought to profit, which goes against the principles of life insurance.
You should immediately inform your existing insurers about the multiple policies that you own and if they have any objections to the same. Also, you should consolidate the number of policies that you have, especially term plans, to at best two. This way, you gain from the convenience of managing few policies and at the same time benefit from premium discounts on offer on high value policies. Ask your existing insurer like Kotak to consolidate your term plans under a single plan before you surrender and look for fresh cover.