Term versus ULIP for a Teacher with a Home Loan
Ms. Sahu, 34, is a primary school teacher in Cuttack earning ₹28,000 a month. Her husband earns ₹35,000 a month. They have two children aged 8 and 4. The family has a home loan with outstanding principal ₹22 lakh and EMI ₹18,000. Savings are ₹1.5 lakh in a bank FD, and both spouses have EPF. Ms. Sahu wants to 'save for the children’s education in 10 years and also get insurance.' An agent proposes a unit-linked insurance plan with annual premium ₹1.2 lakh for a 10-pay term, sum assured ₹25 lakh, 5-year lock-in, and fund management charge of 1.35% a year. He says it gives 'double benefit of insurance and investment' and that she can 'withdraw after five years.' A pure term plan for ₹1 crore would cost about ₹15,000 a year. The family’s monthly household expenses are ₹40,000.
1. Assess whether the proposed ₹1.2 lakh annual premium is affordable and suitable. Use the numbers to support your answer.
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The premium is not affordable. Household gross income is ₹28,000 + ₹35,000 = ₹63,000 a month, or ₹7.56 lakh a year. The proposed premium of ₹1.2 lakh is 15.9% of gross household income and 35.7% of Ms. Sahu’s own ₹3.36 lakh annual income. Household expenses are ₹40,000 a month (₹4.8 lakh a year) and home-loan EMI is ₹18,000 a month (₹2.16 lakh a year), together ₹6.96 lakh. That leaves only about ₹60,000 a year before school fees, transport, medical and other costs. A ₹1.2 lakh premium would force borrowing or lapse. Suitability is also poor: a 20-year product with a 5-year lock-in is being sold for a 10-year education goal, the sum assured ₹25 lakh is small compared with the ₹22 lakh loan, and the illustration does not support the agent’s claim of 'double in five years.' IRDAI’s suitability and mis-selling rules require the needs, risk profile and affordability to be assessed.
2. Estimate a reasonable life cover for Ms. Sahu using the need-based approach. Show your assumptions.
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Need-based cover: outstanding home loan ₹22 lakh; children’s education target ₹20 lakh (₹10 lakh each in today’s costs, before inflation); income replacement for the family for about 10–15 years. If the family needs ₹3 lakh a year after her husband’s income, 10 years gives ₹30 lakh; a rough 10× her income gives ₹33.6 lakh. Add loan and education: 22 + 20 + 33.6 = ₹75.6 lakh. Subtract existing financial assets of ₹1.5 lakh and EPF balances (say ₹3–4 lakh), giving about ₹70–72 lakh. A round cover of ₹75 lakh to ₹1 crore is reasonable, with scope to increase after the loan or education costs rise. This is a judgement, not a precise formula: the key is that ₹25 lakh ULIP cover is inadequate because it is barely above the loan and ignores education and income replacement. The husband’s income helps but would not service the EMI and household expenses alone if she died.
3. Compare the ULIP proposal with buying term insurance and investing the premium difference. Recommend a plan, including rider and premium mode.
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Comparison: term plan of ₹1 crore costs about ₹15,000 a year, leaving ₹1.05 lakh a year to invest. Over 10 years at, say, 7–8% in PPF/ELSS/index funds, the invested amount plus returns can be targeted for education, with liquidity and no 5-year lock-in beyond the product chosen. The ULIP costs ₹1.2 lakh a year, has only ₹25 lakh cover, charges 1.35% fund management plus other charges, and locks money in; 'withdraw after five years' ignores surrender charges and the fact that the goal is 10 years. Recommendation: buy a ₹1 crore term plan with accidental death benefit and critical illness rider if affordable, pay annually to avoid mode loading, and invest the difference in a diversified portfolio (PPF for safety, ELSS/index fund for growth) earmarked for education. Keep the term cover in force; do not mix insurance and investment merely for tax or agent commission. Review cover after 2–3 years and on any new loan.