When purchasing a life insurance, people get confused whether it is wise to have a cover till just the age of 60 or to keep it till 70 or even the age of 80-85. And then if the confusion wasn’t enough, there are whole-life covers as well.
Let’s talk a bit about till what age should you target your Life Insurance cover? Or let’s say what should be the tenure of term insurance?
You already know that life insurance is important if you have people financially dependent on you. The insurance premium is a small payment to cover the event that can be emotionally as well as financially demanding for these people. But yes, if you don’t have any dependents, then you obviously don’t need life insurance.
Let’s assume that you do need insurance.
So the obvious question you will have in mind is – How much life insurance do you need?
But there is no one right answer here.
Everybody’s financial situation is different and hence, they will have different answers to how much life insurance do I need?
So let’s proceed… the next question should be:
Till What Age should you take your Life Insurance?
For a moment think about it.
Life insurance is basically there to cover the risk of early, unexpected death of an earning person and to hedge the risk of loss of his/her income.
So ideally Life Insurance cover should only be there till the retirement if loss of income is the only factor. Isn’t it?
And conservatively speaking, by that time (i.e. your retirement year), most of your regular financial goals would have been achieved and you would already have enough savings to take care of you & dependents. And mind you, there are high chances that by then, your children won’t be dependent on you. So your only dependent might be your spouse. For which you would already have big enough saving (or call it retirement corpus) that can take care of everything. So, no need for insurance coverage much beyond the planned retirement age.
Another point here is that you don’t need life insurance if you achieve a state where you have enough wealth to fund your financial goals.
Think about it. It is fairly obvious. If you already have enough savings to fund your retirement and other financial goals, then you don’t need life insurance at all.
So first, you must figure out whether you need life insurance at all. If the answer is no, well and good. But if you need it, then correctly calculate how much life insurance you need and limit it to your retirement age or few years more. That’s it.
Now let’s see what is the impact of chosing different insurance periods.
Suppose you are 30-year old who wishes to buy a Rs 1 Crore cover.
Assuming you plan to retire at 60, the policy term of 30 years is fine. But let’s say that for some reason, you are contemplating coverage till the age of 75. In that case, the policy term needed is 45 years. I checked the premiums for a healthy non-smoking 30-year male living in a metro city. The annual premium for a 30-year policy was about Rs 9500-Rs 10,000. And that of a 45-year policy was about Rs 13,500-14,000.
Let’s take another example.
Suppose you are 45-year old who was late in realizing the benefits of correct life insurance coverage and hence, wishes to buy a Rs 1.5 Crore cover. Assuming you plan to retire at 60, the policy term of 15 years is fine. But let’s say that for some reason, you are contemplating coverage till the age of 75. In that case, the policy term needed is 30 years. I checked the premiums for a healthy non-smoking 45-year male in a metro city. The annual premium for a 15-year policy was about Rs 28,000. And that of a 30-year policy was about Rs 42,000.
So what is happening here is that you are paying more every year to have the flexibility of having the coverage till late in life.
By choosing the right tenure, you can save some money on the premium. But if being protected for few more years after retirement is what you wish, then so be it. I cannot stop you. 🙂
Another approach can be to ladder your insurance policies. This is known as life insurance laddering. For example, at the age of 30-years, you may buy 3 covers as follows:
- Rs 50 lakh cover for 25 years
- Rs 50 lakh cover for 30 years
- Rs 50 lakh cover for 35 years
So, the effective life cover you have is:
- Between age 30 and 55 – Rs 1.5 Cr
- Between age 55 and 60 – Rs 1.0 Cr
- Between age 60 and 65 – Rs 50 lakh
- Beyond 65 – Nil
As you near your retirement, your coverage and premiums outgo reduces.
This laddering of insurance might seem like a smart optimization strategy but depending on your personal circumstances and premium quoted, it might even make sense to just keep one simple and large-enough life insurance policy and then stop paying it once you feel cover is not needed. Plain and simple.
Now here is an important thing – Whether you keep life insurance only till retirement or upto 85 years or whether you buy a single policy or create a smart life insurance ladder, you still need to invest for your goals. Life insurance will take care of things if you die. But if you survive, then you are on your own and only your savings will help you. Think about it.
Therefore, irrespective of whether you life cover stretches to the age of 60 or 85, it’s much more important to save enough for your retirement years. This is not going to be easy as with increasing life expectancy, you will live really long in retirement. So you don’t want to run out of money before you die. Isn’t it?
But I must mention that like investments, there is no one-size-fits-all solution to insurance needs.
Your unique situation might demand different products or tenures than what we discussed in this article. So it’s always best to understand your Insurance Portfolio needs and then take a call.
And please do tell your family that you bought a life insurance policy. No point having it and not telling them as it is them who will have to ask the insurance company to pay the money to them eventually.