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Home >Money >Q&a >Should you opt for a traditional life insurance cover or market-linked Ulip?

I am 31 and have become a father recently. I want to buy life insurance cover for myself but can’t decide whether to go for a traditional plan that gives assured returns or a Ulip that offers market-linked returns. Which will be a better option for a person in my situation?

-Name withheld on request

Let me respond to your question with another question. How much life insurance cover do you already have? Ideally, one must have life insurance coverage equal to 8-10 times annual salary. If your annual salary is 12 lakh, you need an insurance cover of at least 1 crore. If you have big-ticket loans, you will need more insurance to cover those outstandings.

A traditional plan or a unit-linked insurance plan (Ulips) with a cover of 1 crore will charge a prohibitively high premium of almost 10 lakh a year. Your best option is a pure protection term plan with no maturity value but offers a very high cover at a comparatively much lower price. At 31, you will need to shell out about 8,000-9,000 per year for a cover of 1 crore for 29 years. Consider buying a traditional insurance plan or a ULIP only if you already have a term insurance cover in place.

A guaranteed income insurance plan offers assured but very low returns. Don’t get swayed by the huge maturity value shown in the benefit illustration. Inflation would conflate value over the years. In most plans, the return is no more than 5%.

A Ulip is a better idea because it will invest your money in growth assets. A Ulip works just like a mutual fund. But since these are insurance plans, the income from a ULIP is fully tax-free if it offers a cover of 10 times the annual premium. You can switch from equity to debt and vice versa without incurring a tax liability.

You could even consider buying a child Ul with a waiver of the premium option. The tenure and payouts of such plans are aligned with the child’s goals. If the insured parent dies, future premiums are waived, and the plan continues. This ensures that the child’s goals are met even if the parent is not around.

(Raj Khosla is Managing Director of MyMoneyMantra.com. Queries and views at mintmoney@livemint.com)

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