Matching four needs to a product mix on a fixed ₹60,000 premium budget
Sunita Rao, 34, is a government schoolteacher in Kochi earning ₹9,60,000 a year and is the family's stable earner; her husband's catering income varies. Their son is six. She lists four needs: (i) ₹20,00,000 of protection on her own life for the next 20 years; (ii) about ₹12,00,000 in today's money for the boy's engineering course in 12 years; (iii) a guaranteed corpus for her retirement at 58; (iv) deduction under Section 80C this year. She has ₹60,000 a year of surplus for premiums, no appetite for market-linked products and no wish to borrow to pay premiums. Her bank relationship manager, who earns more on unit-linked plans, has proposed a single ₹1,20,000-a-year ULIP that, he says, 'covers everything and gives 12% returns'. Sunita is about to sign.
1. Recommend a product mix for Sunita within ₹60,000 a year, showing the arithmetic of why the education target cannot be fully funded today.
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Start with the arithmetic, because that decides the plan.
Education goal: ₹12,00,000 today, 12 years away. At 6% inflation, the target is 12,00,000 × 1.06^12 ≈ ₹24,00,000. Even putting the whole ₹60,000 a year into a guaranteed savings plan would accumulate only about ₹10,00,000–₹11,00,000 at typical endowment yields - roughly half the target. So the goal must be part-funded and stepped up as her salary rises.
Suggested split:
- Pure term plan, 20-year term, ₹20,00,000 cover: the largest cover for the smallest outgo (often under ₹20,000 a year for a 34-year-old non-smoker), leaving room for savings. This meets need (i) properly - a savings plan would give far less cover for the same money.
- Endowment or money-back plan with a 12-year term, around ₹30,000 a year: the term matches the goal, the proceeds are guaranteed, and she can add the rest from a recurring deposit or PPF.
- Deferred annuity (for example, a deferred annuity plan purchased now or later): a small allocation for the retirement floor; annuities convert capital into lifelong income, which is what retirement needs. All premiums together stay near ₹60,000, well under the usual 10% of income ceiling.
2. Critically examine the relationship manager's single-ULIP proposal. What rules and suitability principles does it offend?
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The proposal fails on affordability, suitability and conduct.
- Affordability: ₹1,20,000 is double her stated surplus of ₹60,000. Premiums would be paid from borrowings or the plan would lapse - and a lapsed ULIP is the worst outcome for a first-time buyer.
- Suitability: she expressly rejected market risk. A unit-linked plan transfers investment risk to her and has no guaranteed maturity value, so it cannot fund a fixed education target twelve years out.
- Fit for purpose: a single product cannot deliver cheap high protection, a guaranteed education corpus and a retirement income floor. ULIP life cover is typically thin relative to the premium paid.
- Misrepresentation: promising '12% returns' is precisely the kind of assured-return claim that conduct rules prohibit; benefit illustrations must show realistic, non-guaranteed rates and the charges.
- Conflict of interest: the recommendation is driven by the distributor's higher payout, not her needs. Need analysis, documented rationale and her signed suitability assessment are required, and she is entitled to a benefit illustration and a free-look period.
Advice: decline, ask for the illustration in writing, and buy protection and guaranteed savings separately.
3. Sunita is willing to add one rider. Which rider would you recommend for her, and what limits apply?
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Recommend the Accidental Death and Disability Benefit Rider on the term plan.
Why: Sunita commutes daily and is the sole stable earner. The rider pays an additional sum on accidental death and a lump sum plus waiver of future premiums on permanent disability - the scenario where her income stops but the family's expenses do not. It costs very little per ₹1,00,000 of cover, so it buys a large increase in protection inside her budget.
Alternatives considered: the Critical Illness Rider is valuable but adds meaningful cost, has a waiting period and survival clause, and pays only on listed illnesses; the Term Assurance Rider only duplicates death cover she already has cheaply through the base term plan; the Premium Waiver Benefit Rider makes sense where the policyholder's income funds a long-term savings plan, so it could be added later to the endowment once cash flow improves.
Limits and rules to state to her: a rider cannot be bought standalone - it must attach to a base policy; rider sum assured is normally capped as a proportion of the base sum assured and is subject to the plan's minimum and maximum ages; the rider has its own term, which cannot run beyond the base policy; and the rider premium qualifies for Section 80C along with the base life insurance premium. Riders lapse with the base policy, so premium discipline matters.