Life Cover for a Kirana Shop Owner: Term versus Endowment
Ramesh, 36, runs a kirana shop and earns about ₹4.8 lakh a year. His personal expenses are ₹1.2 lakh; the rest supports his wife, two children aged 8 and 4, and his 65-year-old mother. He has a ₹12 lakh home loan, savings of ₹3 lakh, and an endowment policy with a sum assured of ₹5 lakh for which he pays ₹40,000 annual premium. An agent proposes another endowment policy with a ₹1 lakh annual premium, saying it will “create wealth and cover risk”. Ramesh is also offered a term plan of ₹1 crore for a much lower premium. He smokes occasionally but has not been asked about it. He wants to know how much cover he needs, whether the endowment proposal is suitable, and how to protect his family if something happens to him.
1. Estimate Ramesh’s human life value using the income-replacement approach, stating your assumptions. How much additional cover does he need?
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Income available to the family = ₹4.8 lakh − ₹1.2 lakh personal expenses = ₹3.6 lakh a year. Assume Ramesh works to age 60, giving 24 years, and use a discount rate of 6% to value a stable real income stream. Present value factor for 24 years at 6% is about 12.55, so human life value ≈ ₹3.6 lakh × 12.55 = ₹45.2 lakh. Add the outstanding loan of ₹12 lakh because the family must repay it; total need ≈ ₹57.2 lakh. Subtract existing cover of ₹5 lakh and liquid savings of ₹3 lakh, giving an additional need of about ₹49 lakh, say ₹50 lakh.
This is a planning estimate, not a precise actuarial valuation. If income is expected to rise with inflation, the cover should be higher; if the family can reduce expenses, it may be lower. The important point is that the existing ₹5 lakh endowment is far below the need.
2. Assess the suitability of the proposed ₹1 lakh premium endowment policy and recommend a suitable product mix. What conduct issues arise from the agent’s proposal?
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A ₹1 lakh premium is about 21% of Ramesh’s annual income and nearly 28% of his income after personal expenses. That is likely unsustainable alongside a home loan and family expenses, and lapse would cause loss of cover and surrender value. The endowment is savings-heavy and gives low death cover relative to need. It is not wrong to save, but life insurance should first replace income; savings can follow once the risk cover and emergency fund are in place.
A suitable mix is a term plan of about ₹50 lakh to age 60, a critical illness or accident rider if affordable, health cover for the family, and an emergency fund of three to six months’ expenses. The existing endowment can continue if the premium is manageable; surrendering it early may cause a loss. The agent has not asked about smoking, which is a material underwriting fact, and is pushing a commission-heavy product without a needs analysis. That is mis-selling and risks a later claim dispute.
3. Explain to Ramesh the purpose of nomination and the limited role of a nominee. When might a MWP Act trust be useful?
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A nominee is a person authorised to receive the policy money on the death of the life assured; the nominee is not necessarily the owner of the money. Under the insurance law framework, the nominee receives the amount as a trustee or receiver for the legal heirs, unless a valid nomination or testamentary disposition provides otherwise. For minor children, an appointee should be named. Ramesh should nominate his wife and keep the nomination updated after marriage, birth or change of status.
A policy effected under the Married Women’s Property Act can create a trust for the wife and children, so the proceeds do not form part of Ramesh’s estate and are less exposed to creditors. It is useful where he wants ring-fenced family protection, especially with business liabilities. He should also disclose smoking and health details accurately; non-disclosure can jeopardise the claim within the contestability period.