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Investment horizon must be long enough for maximum gains

Adequate cover or the sum assured you should opt for can be determined using the Human Life Value method; as a thumb rule,8-10 times of the annual earning is suggested.

Written by Suresh Agarwal | Published: July 3, 2012 3:57:23 am

I am 35 years old and plan to buy a term policy. How will I decide on the sum assured (SA) and can I increase the SA after some years of continuing the policy?

Pankaj Sharma

Adequate cover or the sum assured you should opt for can be determined using the Human Life Value (HLV) method; as a thumb rule,8-10 times of the annual earning is suggested. This is the ‘net present value of an individual’s potential future earning over the remaining life span’.

The cover should be sufficient to guarantee one’s family a corpus that mirrors how much one is likely to earn and save over a lifetime. Apart from mitigating loss of income arising from premature death,this will also ensure that the life insured’s family is able to sustain their standard of living.

Consider buying online as this would result in significant saving. Some term policies offer a step-up option whereby the sum assured can be increased at different points during policy term to better reflect the policyholder’s changed financial circumstances and needs.

I am reading a lot of negative news related to unit-linked insurance plans. Is it advisable to take one now as I am looking for an investment-cum-protection plan?

Surender Kumar

Unit-linked plans in their current form are actually extremely transparent and customer friendly. Also,equities,as an asset class,have shown to deliver better returns over the long term. Though the returns in Ulips are linked to market performance,since the investment is made regularly over a long period of time,the corpus can be expected to be significant.

Several Ulips are available that offer high protection-to-savings ratio and you should find a product suitable to your needs. But do bear in mind that insurance products are designed to deliver over the longer term. So,your investment horizon must be long enough to unlock the maximum value out of any insurance product.

I am a salaried employee and have a home loan. Will it be beneficial if I take an insurance policy under Married Women’s Property Act so that in case of any eventuality,my wife and son may not have to pay the balance amount?

Ramesh Yadav

If the purpose is to ensure that the policy covers the loan,then buying under MWP Act is not useful,since under the MWP Act,benefits at death cannot be paid to claimants,creditors,legal heirs,etc. For this,you could consider taking a policy with your lender as the nominee for the loan amount. On the other hand,if your objective is to ensure that in case of any eventuality,the death benefit goes only to your wife and/or child,then taking a policy under MWP Act is advisable. Under the Act,benefits can only be paid to wife or children in a ratio pre-determined by the life insured.

The author is executive vice-president,Kotak Mahindra Old Mutual Life Insurance

Send your queries at fepersonalfinance@expressindia.com

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