₹2 Crore Term or ₹5 Lakh a Year Endowment: A Needs and Affordability Judgement
Nikhil Rao, 34, earns ₹18 lakh a year (take-home ₹1.25 lakh a month); his wife earns ₹4 lakh. Household expenses are ₹55,000 a month and they pay ₹41,000 a month on a ₹45 lakh home loan with 18 years remaining. Their son is 3. They hold ₹6 lakh in mutual funds, an employer group cover of ₹24 lakh that lapses when he leaves the job, a ₹50 lakh individual term plan, and no emergency fund. Nikhil wants 'guaranteed savings plus insurance'. His agent has proposed either a ₹1 crore endowment money-back plan with a 10-year premium paying term at ₹5 lakh a year, or a ₹2 crore term plan at about ₹26,000 a year with the difference invested separately. He can set aside roughly ₹3.5 lakh a year after all expenses and loan EMIs, and wants to retire at 60.
1. Estimate Nikhil's insurance need on a needs basis and comment on his existing cover.
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Build the need, component by component (state assumptions openly):
- Loan repayment: ₹45 lakh. The family should not have to sell the house; the full outstanding must be covered.
- Income replacement: household expenses of ₹6.6 lakh a year for 20 years until the child is independent, discounted at a 6% real rate, gives an annuity factor of about 11.47, so ₹6.6 lakh × 11.47 ≈ ₹76 lakh.
- Child's education and marriage: about ₹40 lakh in future value.
- Final expenses and contingency: ₹10 lakh.
- Gross need: 45 + 76 + 40 + 10 = ₹171 lakh, about ₹1.7 crore.
Deduct what already exists: mutual funds ₹6 lakh and the individual term plan ₹50 lakh. The employer group cover of ₹24 lakh is excluded because it lapses on resignation, which is precisely when the family is most exposed. Net additional need ≈ ₹115 lakh.
Sanity check by income multiple: 10-15 times income for a 34-year-old is ₹1.8-2.7 crore gross, consistent with the needs figure. Recommend about ₹1.25 crore of additional pure term cover as a floor and note that the correct figure rises if education is planned abroad. The current ₹50 lakh is barely a third of the requirement; the household is significantly under-insured.
2. Evaluate the two proposals on affordability, liquidity, tax and product suitability.
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Affordability. ₹5 lakh a year is 28% of gross income and about 144% of his entire annual surplus of ₹3.5 lakh. It cannot be paid from surplus at all; it would have to be funded by cutting household spending or stopping investments, which is the classic route to lapse or surrender in year three. The term plan at ₹26,000 is 1.4% of gross income and roughly 7% of the surplus, leaving about ₹3.2 lakh a year for investments.
Liquidity. There is no emergency fund. Six months of expenses plus EMI is (₹55,000 + ₹41,000) × 6 ≈ ₹5.76 lakh. Locking money into a 10-year premium commitment before this buffer exists is a solvency risk for the household.
Tax. The endowment premium of ₹5 lakh on a ₹1 crore sum assured is 5% of the sum assured, so it passes the 10% test. But adding the term plan issued after 1 April 2023 takes the aggregate premium on such policies above ₹5 lakh, and under Section 10(10D) the endowment's maturity proceeds then lose exemption entirely. The very combination sold as 'insurance plus tax-free savings' destroys the tax-free status; the term plan's death benefit remains exempt regardless.
Suitability. The goal is protection plus long-term savings, and a term plan plus disciplined market investment serves that better at this age. A money-back endowment is a low-return, high-premium instrument that is unsuitable at 28% of income. The ₹1 crore cover in the endowment is also less than a third of the need.
3. What must the agent do and document to make any recommendation defensible?
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Document the advice, not just the sale. Prepare a written needs analysis showing income, liabilities, goals, existing cover, the ₹1.7 crore requirement and the shortfall; keep the signed copy. Record why the term-plus-investment option was recommended and why the endowment was not, so the file shows a considered judgement rather than a commission decision.
Suitability and disclosure duties. Explain the benefit illustration and the charges in the ULIP or endowment if either is sold, disclose the nature of the product honestly (an endowment is not a 'tax-free investment' unless the 10(10D) conditions are met), and tell him about the 30-day free-look period from receipt of the policy, the grace period for renewal premiums (30 days for non-monthly modes) and the revival window, so he can exit without penalty if he changes his mind.
No inducements. No rebate, no paying the first premium from his own account, no offering to share commission; Section 41 makes the offer of a rebate punishable with a penalty up to ₹10 lakh.
Third-party and KYC checks. Premium must come from the proposer's account, with KYC completed and a declaration where a permitted relative pays, and the AML thresholds respected.
Post-sale service. Remind him to build the ₹6 lakh emergency fund before increasing the premium commitment, and set a review date linked to the loan and to the child's education goal rather than to a fresh sales call.