How to Use a ₹3 Lakh Maturity: Emergency Fund, Term Cover or the 'Guaranteed 12%' Plan?
The Das family of Barrackpore has just received ₹3,00,000 on maturity of an endowment policy. Mr Das is 44 and earns ₹32,000 a month as a supervisor; Mrs Das earns ₹9,000 from tailoring. Their monthly household spending is ₹28,000 including a ₹6,500 home loan EMI, and their savings are ₹14,000 in a savings account. Their only insurance is the policy that has just matured, which paid ₹3,00,000 on survival; there is no health cover. Their daughter is 14 and will need about ₹1,50,000 for admission and first-year fees in four years. An agent is pushing a unit-linked plan: ₹30,000 a year for 10 years, with a 'guaranteed 12% return' and a lock-in. The bank also quotes a 2-year fixed deposit at 7.0% and PPF at 7.1%. Mr Das wants to put the entire ₹3,00,000 into the unit-linked plan because 'the agent is a family friend and 12% beats 7%'.
1. Before choosing any product, what must the family fund first? Use the figures to justify a split of the ₹3,00,000.
Read the worked answer
Monthly inflow is ₹41,000 against spending of ₹28,000, so the surplus is ₹13,000; savings of ₹14,000 are almost nothing. Three needs come before any investment product.
- Emergency fund. Six months of expenses = ₹28,000 × 6 = ₹1,68,000. Put ₹1,20,000 in a sweep-in FD/liquid fund now and build the rest from ₹3,000 of the surplus. This is what prevents the next shock becoming a 36% moneylender loan.
- Term life cover for Mr Das. The EMI, the education goal and 12+ years of income depend on him. A ₹1 crore, 20-year term plan costs roughly ₹20,000–25,000 a year for a 44-year-old non-smoker - about two months of surplus - and is paid from income, not from the maturity money.
- The ₹1,50,000 education goal in four years. This is a fixed, short horizon: ₹1,50,000 discounted at 7% needs about ₹1,32,000 today, or roughly ₹32,000 a year in a recurring deposit. Allocate ₹1,00,000 to a 4-year FD ladder against this goal and add ₹2,000 a month from the surplus.
Suggested split of ₹3,00,000: ₹1,20,000 emergency/sweep FD; ₹1,00,000 education FD ladder; ₹80,000 in PPF for the long term (15 years, 7.1%, partial withdrawal after 5 years). From the ₹13,000 surplus: ₹3,000 SIP, ₹2,000 education RD, term premium as it falls due.
Not funded: a ₹30,000-a-year plan locked for 10 years, because it would swallow the surplus and still leave the family without cover.
2. How should the family respond to the 'guaranteed 12%' pitch? State what to verify and two protections available under the rules.
Read the worked answer
Three questions dismantle the pitch.
- Is the return guaranteed, or only the illustration? A unit-linked plan is market-linked: the fund value can fall. What is usually 'guaranteed' is a small assured amount at maturity (often about 101% of premiums paid), not 12% a year. Traditional endowment-type plans do have an assured element, but their effective return over 10 years is normally far below 12%.
- Ask for the written benefit illustration. The regulator requires illustrations at 4% and 8% assumed gross returns, not 12%. If the agent's sheet shows 12%, it is not the regulated illustration. Ask for the net maturity value after all charges at 8% and work out the effective annual return.
- Look at the charges and the lock-in. Premium allocation charge, policy administration charge, fund management charge, mortality charges, and a 5-year lock-in; charges bite hardest on the money paid in the first two years - exactly the money the education goal needs.
Two protections under the rules:
- Free-look period: 15 days from receipt of the policy (30 days for distance or internet sale) to return it for a refund.
- Mis-selling remedy: if 12% guaranteed was promised orally but not in the document, complain to the insurer's grievance officer and then to the insurance regulator's grievance portal; the signed proposal form and illustration are the evidence.
Judgement: decline. A ₹3,00,000 commitment over 10 years absorbs most of the family's surplus, while the four-year education goal and the absence of life and health cover are unmet.
3. What cover does Mr Das actually lack, and why is a term plan rather than an endowment or unit-linked plan the right answer at his age and liabilities?
Read the worked answer
He lacks protection, not a savings scheme.
- No life cover. A ₹3,00,000 surviving endowment replaced nothing. On his death the family would still owe the home loan and would lose ₹32,000 a month. Replacing ₹32,000 a month for even 15 years needs a corpus of roughly ₹50–60 lakh, so ₹10–15 lakh of cover is inadequate; ₹1 crore is the sensible minimum.
- No health cover. One hospitalisation costing ₹2,00,000 would wipe out the maturity amount. A family floater of ₹5–10 lakh is the second purchase, before any investment product.
- Why term and not endowment/ULIP: an endowment or unit-linked plan mixes insurance with saving, so a small premium buys a small cover and a modest return. The need here is a large cover at a low price: about ₹20,000–25,000 a year buys ₹1 crore of term cover, roughly one month's surplus. Term plus a separate SIP or RD separates the two jobs and lets each be judged on its own merit. The policy that has just matured proves the point - years of premiums produced ₹3,00,000 and no cover worth the name.
Sequence for this family: term and health cover first (from income), emergency fund next, the four-year education goal third, PPF/SIP last.
Principle to state in the answer: insurance is for the event that has not happened; investment is for the goals the family can name. One product cannot do both well.