It is a well-known fact that term insurance is essential for everyone. It gives our family a certain level of financial stability, if we are not around, that is hard to get otherwise through the other instruments in our early stage of life. But what should be the tenure of term insurance? To make it simple, let us first understand how a life insurance works.
A term insurance has two parties, the insurer and the insured. The insurer could be any one of us. For example, if I am the sole earning member of my family and am worried about what would happen to them post my death, I would need some sort of financial backup to leave them with. This is where the insurer comes in. The insurer in most cases is an insurance company that has been recognized by the IRDAI.
So how exactly does a term insurance work?
It is relatively simple. I am the insured in this case, and the insurer is somebody who promises to pay my family in case of my death. So, what happens exactly is, I will pay the insurer an amount called premium every month till a certain age. The insurance cover is also not till infinity. It is either till the age mentioned above, or my death, whichever is earlier. The premium is the income for the insurance company. The best-case scenario for the insurance company is if I don’t die till the age the insurance is valid for. The worst-case scenario would be if I die early. In which case, they will take very less premium, but will have to pay the entire in sum assured out to my family.
The question that haunts everyone is, what should be the duration of a term insurance plan? What is the prefect tenure of term policy?
Also Read : How much term insurance do I need Calculator
What should be the tenure of term insurance -To cover you till Age 60, Age 70 or Age 99?
Most term insurance policies are offered till the age of 75 or 80. The general trend in the previous generations was to take one of the whole life policies. There was no confusion. No deliberations to be made. But this all changed recently. With the increase in medical care, and a corresponding increase in the longevity of people, many insurance companies have also started offering insurance policies till the age of 99. That is, they virtually cover your entire life, and the sum assured is almost certain.
What is the catch? Why are they doing that? Did we not say earlier that the insurance company makes maximum profits if we don’t die?
Okay, it is not that simple! They do make maximum profits if you don’t die, but there is a little thing called compounding that we have missed out on.
Insurance companies actually charge a higher premium for insurance policies that are over and above the age of 60 or 70. Higher the term of policy, more the premium is. This helps them cover the extra cost of paying the sum assured out to the insured. And considering, most people anyway don’t live longer than 70-80 years old, insurance policies tempt them to go for the longer 99 year policies, thus making a heavier gain out of their premium paid.
Let us look at an example to check what should be the tenure of term insurance
Today I’m 25, and have an insurance policy with a renowned insurance company till the age of 60. Considering my physical fitness, and the fact that I do not smoke or drink, the premium that I pay is a merely 661/- per month. The sum assured is 1 crore. Thus, if I die before the age of 60, I will have to pay the premium of 661/- every month till I die. If I do not die by the age of 60, the insurance company gains by pocketing the entire premium I paid for 35 years, and will recognize a gain. This is simple, right?
So, let us imagine I take an insurance policy for 80 years. Like the one I mentioned before, this would cover me till the age of 80 or my death, whichever is earlier. The premium would also be slightly higher, let’s say the amount of premium being charged is now 1024/- instead of the 661/- mentioned earlier. Why is the premium higher? Because they are covering us for a longer duration.
What if I take an insurance policy for 99 years? Like the one I mentioned before, this would cover me till the age of 99 or my death, whichever is earlier. The premium would also be slightly higher, let’s say the amount of premium being charged is now 1892 /- instead of the 1024/- and 661/- mentioned earlier.
Thus, it is higher than normal.
What should be the duration of a term insurance plan?
Okay, so let us look at the different scenarios now. What should be the duration of a term insurance plan- 25 years, 35 years or 50 years.
Scenario 1- Duration of Term Insurance Plan- More than 50 Years
The insured does not die till the age of 99. How likely is this? Not very. Less than 0.01% of the population survives above the age of 99. Thus, this is the most unlikely of all the scenarios that we have on board. So, if I die after the age of 99, who wins? The insurance companies.
Likeliness: Most Unlikely
Who Wins: The Insurance Company
Who Loses: The Insured (In this case, yours truly!)
Scenario Two – Tenure of Term Insurance
The insured dies between the age of 80 and 99. Remember, this is why the insured is actually taking the insurance. He wants to be covered even in case he dies after the age of 80. So assuming I die at the age of 85, I will get the entire sum assured. Considering the medical advancements in the field of science today, we cannot entirely rule out the above from happening. Is it possible? Definitely.
Let us see the calculations if I die at age 85.
Sum Assured – 1 Crore
Premium for cover up to age 60 – Rs. 661/- per month
Premium for cover up to age 99 – Rs. 1892/- per month
Premium Difference – Rs. 1892- Rs. 661 = Rs. 1231/- per month
Sum assured if I die at age 85 – 1 Crore
Invest 1231/- per month in equity mutual funds, assuming a CAGR of 12%
Value at age 85 – 16 Crores (Unbelievable, Right!)
Likeliness: Unlikely
Who Wins: The Insurance Company
Who Loses: The Insured (In this case, yours truly!)
Scenario Three – Tenure of term insurance till age 80
The insured dies between before the age of 80. In this case, did we really have to take the extra insurance? Did we really need to pay the extra 3363/- per month as premium? Remember, the 363/- might seem like a small amount but in the long run it is a huge chunk of money. And what is the likeliness of somebody dying before the age of 80 today? A whopping 90% of people in the world die before the age of 80. So it is more than likely? Definitely!
Let us see the calculations if I die at age 75.
Sum Assured – 1 Crore
Premium for cover up to age 60 – Rs. 661/- per month
Premium for cover up to age 80 – Rs. 1024/- per month
Premium Difference – Rs. 1024- Rs. 661 = Rs. 363/- per month
Sum assured if I die at age 75 – 1 Crore
Invest 363/- per month in equity mutual funds, assuming a CAGR of 12%
Value at age 75 – 1.5 Crores
Likeliness: Most Likely
Who Wins: The Insurance Company
Who Loses: The Insured (In this case, yours truly!)
Term Insurance at Age 60 or Age 70
It does not make any sense to take term insurance at age 60 or age 70 if you are thinking of buying one.
Also Read: Term Insurance Benefits
The Income Effect in Tenure of Term Insurance
Another important theory that will continue to play a big part in the discussion on which is the best term to take insurance for is – how long do you want to continue earning. If you remember, insurance is only a backup for you not being able to earn when you are actually earning. If I quit my job at 60, and don’t earn after that, paying a premium till 99 is not insurance. It is gambling. It is hoping to die so that your family can earn a huge chunk of money. This is not the purpose of an insurance policy.
Conclusion – Ideal Term for Term Insurance
Yes, it is good to have an insurance policy that covers you for a long time. Yes, a higher premium means more income tax benefits. And yes, more insurance is always better than lack of insurance. But we need to assess and evaluate what kind of policies make the most sense considering our age, and the times we are in. The article clearly shows it does not make sense to go for a 99-year policy, or even anything over 60 years.
Thus, insure yourself only till 60 because this is the age where most of people think that they will achieve financial freedom. Select a tenure of term insurance which covers you till age 60. That is the ideal term for term insurance.
And If you achieve your financial goals before the age 60, just drop your term insurance policy. An insurance must not be a gamble. That should not be the ultimate purpose.
I hope , you are in a better position to decide on what should be the tenure of term insurance?
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