Ask Money Today: Should I surrender my existing term plan to buy bigger insurance cover?

I am 35-year-old and have invested in LIC Jeevan Anand policy, which has an annual premium of Rs 16,171 annually for a sum assured of Rs 3 lakh. The term of the policy is 20 years. I have already paid the premium for 11 years. I also have a term plan for 28 years, with a sum assured of Rs 50 lakh. Now I want to buy a term plan of Rs 1 crore for 40 years. I wish to stop my existing term plan and buy a new one. Please advise, should I surrender my LIC Jeevan Anand Policy as well?

By Balwant Jain, tax and investment expert

As a basic principle of financial planning, never mix your insurance and investment. If you mix both, you neither get adequate insurance cover nor adequate returns on your investments. Insurance and investments are different products and serve different purposes. For your protection, you need to buy a term plan equal to 12-15 times your annual income. For your investment needs, please invest in diversified equity mutual funds through SIP (Systematic Investment Plan).

As far as your present life insurance policy LIC Jeevan Anand is concerned, this is a traditional endowment plan, where the life cover is available for the whole life even after maturity of the plan. With the annual premium you are paying for this policy, you can get a term plan for one crore for 25 years. So stop paying a premium for this policy and surrender it.

Also read: Ask Money Today: Can I pay life insurance premium for my wife, daughter for tax deduction?

Your decision to buy a term plan of a higher amount of Rs 1 crore is good. I would advise you not to discontinue the existing term plan as with advancing age, the premiums also go up. Compare the premium of an insurance cover of Rs 1 crore in new as well as your existing policy. If the cost of the existing cover plus a new cover of Rs 50 lakh cost lower than altogether buying a new term cover of Rs 1 crore, stick to your old term insurance policy and buy an additional cover for Rs 50 lakh to make your total protection cover worth Rs 1 crore.

Ensure to furnish all the details especially the health history of self and family members to minimise the chance of rejection of claim (just in case of need) on the ground of submitting incorrect information.

You can select any insurance company, which has a claim settlement ratio above 98 per cent.

Why do you want to take cover for 40 years at the age of 35 years? Are you going to be gainfully employed that long? The purpose of life insurance is income replacement so in case you do not intend to work till that age, buy life insurance till 60 years of your age which is the retirement age, generally for salaried people.

(Views expressed by the investment expert are his/her own. Email us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts)

Also read: Ask Money Today: Received donations from friends and family; will it be taxable?

Also read: Ask Money Today: Are index funds good for long term goals investment?