When to buy life insurance, and how much

• Do  you wear a seat belt in your car and on the plane?
• Do you lock your house when you go out?
• Do you use sun-block, umbrella, mosquito repellent?
• Do you invest more in low-risk bank products?

Yes to most of them? Anecdotal evidence shows that we are risk averse in our living and investing habits. However, we leave unprotected the biggest risk to dependent families, that of being left without a source of regular income in case of an untimely event that causes a loss of life.

The resistance to life insurance comes at various levels. There are families in which any discussion of an insurance policy, for cover and not investment, leads to emotional scenes - to think of a life without the other is considered to be tempting fate. The other reason, of course, is the belief of immortality that we all live with. Untimely death is something that happens to other people.

So, life insurance is bought, but for the wrong reasons. It is bought to save taxes and for investment. There is a flaw in each of these reasons. If you buy just to save tax, then you are focussed on how much you need to save in order to minimise your tax burden.

You are not looking at what your actual insurance need is. When you are looking at it as investment, you are looking at the rate of return and what you will get back in the next few years, you are not even asking what the sum assured is. Insurance needs to be bought for its own sake. The biggest bang for the buck for this purpose comes from a term life cover.

Which cover to buy?

India's best-selling policies have been endowment assurance policies that double as investment options with tax breaks. It is a two-in-one profile that most insurance buyers are attracted to as in the case of Mumbai-based Ravi and Chitra Iyer, both 37 years old.

Earlier this year, when the Iyers reviewed their insurance portfolio, they realised that the two main risk cover instruments in it were a money-back plan for Rs 100,000 at a premium of Rs 5,133 annually and an assured returns policy for Rs 250,000 with accident benefit and profits at a premium of Rs 10,226 annually for 25 years.

They were paying about Rs 15,359 annually for a Rs 350,000 cover. To increase their life cover, they settled for a pure term cover of Rs 40 lakh (Rs 4 million) for a 20-year period at a premium of just Rs 17,080 annually.

Says Gaurav Suri, director marketing, MetLife India, "The cost benefit of a term plan is yet to sink in for the Indian consumer; a 30-year-old can buy a Rs 10 lakh (Rs 1 million) cover for 10 years at a price less than the monthly cost of a cable connection."

Term insurance is cheaper because the entire premium amount goes towards covering the risk of your life. In the event of your death during the policy term, your dependents will get the cover amount, but if you survive the policy term, you get no benefits or "sum assured".

Term insurance revolves around three factors. The amount of risk cover, age of the person, and the length of cover defines a policy and the premium. In case of term plans, it is lower than any other category of risk cover.

But, term products are the most difficult to come by, as agents often push costlier policies. If a Rs 20-lakh (Rs 2 million) term cover for a 30-year-old for 30 years costs Rs 6,500, a similar cover will cost at least Rs 50,000 in a whole life plan. Endowment and money-back will be even more expensive. The agent calculates his commission and pushes high-value, non-term polices.

How much to buy?

You need the difference between what your assets can earn and what your current expenses need. While there is no one formula that gets the 'right' cover, we can work with a rough rule of thumb and insure our lives for between seven and 10 times our annual income. As incomes go up, so does, hopefully, the corpus of savings that will do away with the need of annual insurance top-ups.

The time when you figure out that you are under-insured, can happen at any age. When 50-year-old H. Narayanaswamy and his 45-year-old wife Sita took a look at their finances 18 months ago, they realised there was a gap between their aim of securing a nest egg for their future and their current corpus.

Says Narayanaswamy, "Earlier, we bought insurance on casual advice from a friend primarily to save tax. As our family's needs grew, we realised our cover of Rs 15 lakh (Rs 1.5 million) was insufficient." So, the couple added on an extra cover of Rs 20 lakh (Rs 2 million) to tide them over the final phase of their earning careers.

When to buy & for how long?

The best time to buy your term cover is when you have a family depending on your income. Says Srikanth Bhagavat, managing director of wealth management firm Hexagon Advisors, "A term cover is suitable when a person is saddled with large liabilities and doesn't have enough assets to cover it." Or else, when a family has a huge gap between current savings and future goals.

The need for insurance starts reducing as a person hits the age bracket of 50-55 years as the retirement corpus begins to bloat.

But, if you find that your financial plan doesn't conform to this model, tank up on insurance by age 50 as term plans have a maximum entry age built into them. Also, at this stage, the cost of premiums can be prohibitive. Thus, it is best to opt for term plans to cover any unfinished liabilities or milestone goals that you might be carrying into the retirement phase.

Choose the right plan

As no surrender or maturity values are attached to a term plan, one should choose the plan that comes with lowest premium. The term of the policy should be the longest possible.

Despite the outward simplicity of a term plan, consumers often end up paying more due to the riders. Remember a term cover is cheap, but make sure you evaluate the riders.

Buy the riders if you must. Most often, it is more cost-effective to buy covers such as accident from general insurance companies. Tax kick: Deduction under Sec. 80C up to Rs 100,000 from the total income.

Smart tip

For the lowest premium and maximum cover, buy a pure term insurance policy without return of premium or riders. Our advice is that you go for the plan that offers the maximum term.