A ₹1 Lakh Premium Target and a ₹6.2 Lakh Income
Vikram, 34, drives a rented auto-rickshaw and earns about ₹6.2 lakh a year after fuel and rent; his wife does tailoring from home for about ₹80,000. They have two children, aged 6 and 2, a ₹19 lakh housing loan with 17 years remaining, ₹1.5 lakh in a recurring deposit, no health insurance and no employer benefits. Vikram's father died at 58 of a stroke and his elder brother at 41 of a heart attack. The branch manager of the agency has set a target of ten endowment policies with ₹1 lakh annual premium each, and a colleague has already assumed Vikram will sign a unit-linked plan with a ₹1.1 lakh premium. Vikram tells the agent, Anita, that he can set aside at most ₹55,000 a year for all insurance and savings together, and that he cannot afford to risk losing money.
1. Carry out a rough protection-needs calculation for Vikram and propose a product mix within his ₹55,000 annual budget. Show your working.
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Step 1 - Income replacement. Household income ≈ ₹7 lakh. Less Vikram's personal expenses, say ₹2 lakh, leaves about ₹5 lakh a year that the family depends on. With roughly 24 earning years to age 58, discounting at about 6% gives an annuity factor near 12.5, so income replacement ≈ ₹62 lakh. A simple 10–12 times income cross-check gives ₹62–74 lakh.
Step 2 - Add the liabilities and goals. Outstanding loan ₹19 lakh; education for two children, at least ₹15 lakh in today's money. Gross need ≈ ₹96–₹1.06 crore. Less existing assets ₹1.5 lakh (and no employer cover) gives a protection gap of roughly ₹95 lakh to ₹1 crore.
Step 3 - Budget within ₹55,000 a year.
- Term plan, ₹1 crore to age 60: indicative premium for a 34-year-old non-smoker is around ₹15,000–₹20,000; a driver's occupation may attract a small loading. This is the non-negotiable core.
- Family health floater, ₹5 lakh: roughly ₹12,000–₹16,000. The brother's death at 41 and the father's stroke argue for this as strongly as for life cover.
- Personal accident cover for the earning member: small premium, high value for a driver.
- Balance (say ₹20,000–₹25,000): a recurring deposit, PPF or a simple guaranteed savings plan for the children's education, kept liquid and low-risk.
Step 4 - Why the ₹1 lakh premium product fails. ₹1 lakh is 16% of gross income and more than double his stated capacity; it would crowd out health cover and almost certainly lapse by year two, leaving him with a surrender-value loss and no protection.
2. How should Anita deal with the branch manager's ₹1 lakh premium target and the colleague's assumption about a unit-linked plan?
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Suitability governs, not targets - and the file must show it.
- The conflict is real but not close. A product that consumes 16% of a driver's income will lapse; a lapsed policy earns the agency nothing in the long run and costs the client his savings. Persistency, not first-year volume, is what sustains an agency.
- Documented needs analysis. Anita should record the income, dependants, loan, existing cover and stated capacity to save, and the recommendation that follows from it. If the branch manager later questions the case size, the file explains itself.
- What she must not do. She must not sign Vikram for a premium he cannot sustain to meet a target; must not overstate projected ULIP returns to justify the premium; must not fund premiums from her own commission (a Section 41 rebate offence); and must not let a colleague complete the proposal on assumptions.
- Escalation. If pressure continues, she should raise it with the insurer's compliance or agency channel head in writing. An agent is responsible for her own advice; 'the branch manager told me to' is not a defence before the insurer or the Authority.
- The conversation with Vikram. Explain the recommendation in his terms - the term plan buys ₹1 crore for the price of a monthly mobile bill; the health policy protects the savings he already has. Let him choose the savings vehicle separately.
3. If Vikram insists on a market-linked product because a relative earned well from one, what must Anita disclose before he signs?
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She must give a full, documented risk and charges disclosure, and record that he understood it.
- The risk. The investment risk in the investment fund is borne by the policyholder. Units can fall as well as rise; the fund value is not guaranteed. Illustrations at assumed rates are projections, not promises, and the higher assumed rate is not a forecast.
- The charges and structure. Premium allocation charge, fund management charge, policy administration charge, mortality charge, and the discontinuance fund if the policy is stopped. These charges are why the early years grow slowly.
- The lock-in and access. A five-year lock-in from the date of commencement, and the conditions under which partial withdrawals are permitted after that.
- The cover element. A small ULIP does not close a ₹95 lakh protection gap; the death benefit must be stated clearly so the client does not mistake an investment product for adequate insurance.
- The right to reconsider. The free-look period under the current Protection of Policyholders' Interests Regulations - 30 days - during which he can return the policy and take a refund of the fund value or premium as applicable. Mention it, and give it in writing.
- The recommendation. Even if he proceeds, Anita should suggest a split: a ₹1 crore term plan for protection plus a modest ULIP at perhaps ₹25,000 a year, with the balance in a guaranteed instrument. If the client still insists on the pure ULIP allocation, she should document his stated objective and confirm in writing that the protection gap remains unaddressed.