Insurance Before Investing
Two policies come before the first SIP: one that pays the hospital, and one that pays your family if you die. Neither is there to make you money, and the policies sold as doing both do each job badly.
Figures checked · How we calculate
₹31Lwhat an endowment policy costs you over 20 years, against term cover plus an index fund
Pay ₹1 lakh a year for 20 years into an endowment policy that returns 5% a year, and you receive ₹34.7 lakh at the end, tax-free. Your family was covered for ₹10 lakh along the way.
Pay ₹10,000 a year for ₹1 crore of term cover instead, and put the other ₹90,000 into an index fund. You end with ₹66 lakh after tax, and your family was covered for ten times as much.
Insure first, because a crash is exactly when you'd have to sell
Say a ₹4 lakh hospital bill arrives in a month when your equity fund is down 30%. To raise ₹4 lakh you sell units that were worth ₹5.7 lakh before the fall. The ₹1.7 lakh difference is a loss you would have waited out. Selling makes it permanent.
Markets and emergencies are not arranged to avoid each other. A job loss is more likely in the same recession that pushes share prices down. So the order is:
None of this needs to be finished before a small SIP starts. It needs to be finished before the SIP is the money you would reach for in an emergency.
Term cover pays only if you die, which is why it is cheap
A 30-year-old non-smoker can buy ₹1 crore of cover until age 60 for about ₹10,000 a year. Over 30 years that is ₹3 lakh of premiums for a promise that your family receives ₹1 crore if you die at any point in those 30 years.
Since 22 September 2025, individual life and health insurance premiums carry no GST, so the premium you are quoted is the premium you pay.
An endowment policy is two products, both priced badly
An endowment or money-back policy bundles a small life cover with a savings plan. Most traditional endowment plans work out at a return of 4–6% a year, and the insurer's benefit illustration shows the real figure if you know where to look. IRDAI makes every insurer illustrate what the policy pays at 4% and 8% gross investment returns. The result below uses 5%, the middle of that range.
- Endowment policy, 5% a year₹34.7 LTax-free at maturity. Life cover along the way: ₹10 lakh.
- ₹1 crore term cover + ₹7,500 a month in an index fund₹66.0 LAfter tax. ₹72.9 lakh before it. Life cover along the way: ₹1 crore.
- ₹1 crore term cover + ₹90,000 a year in PPF₹39.9 LGovernment-backed and tax-free, with no equity risk at all.
- What the endowment costs you₹31.2 LAgainst term cover and an index fund, after tax, for a tenth of the cover.
Endowment: premiums paid at the start of each year, 5% a year net of the policy's charges. Index fund: ₹7,500 a month at 12% before costs, less a 0.2% expense ratio, then sold in one go with 12.5% tax (plus cess) on gains above ₹1.25 lakh. PPF: ₹90,000 at the start of each year at 7.1%, the rate for July to September 2026. The term policy runs to age 60, so its cover continues for ten more years at ₹10,000 a year.
The last row is the uncomfortable one. Even without any equity risk, a government-backed PPF beats the endowment by ₹5.2 lakh and comes with ten times the life cover. The endowment loses on return and on protection at once.
A ULIP is the market-linked version of the same bundle. It invests in the insurer's own equity or debt funds, deducts premium allocation, mortality and fund management charges, and locks your money in for five years. Maturity proceeds from ULIPs issued after 1 February 2021 with a yearly premium above ₹2.5 lakh are taxed like an equity fund, so the tax advantage no longer applies to large policies either.
Already hold an endowment? Buy term cover first, then decide
Don't surrender a policy the day you read this. Whether to keep paying depends on how many years are left and what the insurer pays you to leave, and that differs by policy. Work through it in this order:
The mistake to avoid is a gap. If you surrender first and then find you can't get term cover because of a health condition, the endowment's ₹10 lakh was the only cover you had.
How much term cover: expenses, plus loans, minus what you already have
"Ten times your income" is a rule of thumb. It's better to work from what your family would actually need. Take a 30-year-old earning ₹12 lakh a year:
| Amount | |
|---|---|
| Family's spending, ₹6 lakh a year rising 6% a year for 25 years, from a fund earning 7% | ₹1.34 crore |
| Plus the outstanding home loan | ₹40 lakh |
| Minus investments the family could use | −₹5 lakh |
| Cover needed | ₹1.69 crore |
Round that up to ₹1.75 crore, about 14 times this person's income. Add future costs you are sure of, such as a child's education, if the family's spending figure doesn't already include them.
Put your own family's figures into the term insurance cover calculator, which starts from this example.
A few rules make the cover work when it is needed:
- Cover to your retirement age, not to 85 or 99. The cover replaces income. After you retire there is no income to replace, and those extra years make each premium much higher.
- Disclose everything on the form: smoking, drinking, every diagnosis. A claim can be refused over an undisclosed condition, and the premium you saved by leaving it out is small next to that.
- Buy again when your life changes. A marriage, a child or a new home loan each raise the figure. A second policy is simpler than changing the first.
If nobody depends on your income and you have no loan in someone else's name, you don't need term cover yet. Health cover still applies.
Health cover of your own, not only your employer's
Employer group cover ends the day you leave the job. That day might be a layoff, a gap between jobs or retirement, which are exactly the times you can least afford a hospital bill.
A personal policy bought young is also cheaper to live with. Retail health policies make you wait before they cover an illness you already had, and IRDAI caps that wait at three years. The clock starts when you buy. Buy at 28 and it runs out while you are healthy. Buy at 45 after a diagnosis and it runs out when you're likely to need the cover.
How much health cover is enough has no clean formula. Hospital costs vary a great deal between cities and between hospitals. Ask the hospital you would actually use what a week's stay for a major procedure costs, and buy at least that much. Keep the employer cover as a second layer.