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Exploring the term insurance, mutual fund combo

Your faith in the financial sector will be seriously tested in 2010. The prelude just got over-markets rose globally on the empirically expected post-crisis bounce. A falling dollar and money for free in the US has bathed assets worldwide in a fresh wave of risk-happy cash. Other factors are now making themselves felt. A beginning-to-rise dollar and US President Barack Obama fixing blame on banks that played roulette with public money and gorged on private profit they did not deserve could be the beginning of a second dip in global markets.

NEW DELHI (Reuters) - Opting for a life insurance term plan and investing in tax funds could be the winning combo for insurance seekers looking for overall higher returns.

Term life insurance plans provide high risk cover at low rates and, like auto or health insurance policies, carry no maturity benefit or bonus.

"Term plan provides the cheapest and comprehensive risk cover for family-this is very useful when taken at a young age where the premiums are low," said Sanjoy Banerjee, executive director with ICRA Online.

Though the market is flooded with insurance products, most unit-linked insurance policies (ULIPs) in India have high charges and traditional insurance products do not offer high returns.

For instance, a term plan for a 30-year-old man for a cover of three million rupees for a term of 25 years would cost around 8,500 rupees annually. An endowment plan with the same specifications can cost more than 100,000 rupees annually.

A term plan can help realize one of the most important steps of financial planning -- life insurance -- in a cost-effective manner. The money saved by opting for such a plan can be invested in tax-saving equity funds on a monthly basis to get higher returns.

"If the individual is willing to take the trouble of segregating investment needs distinctly from risk mitigation needs, then term plan and MF (mutual fund) provides a much better combination (than ULIPs or endowment plans)," Banerjee added.

Investments in equity tax funds should be made with a long-term view. Data from fund tracker ICRA Online shows that such funds have on an average returned 18.5 percent annually in the last five years.