Buying Term Insurance: Term insurance plan is the purest form of life insurance as it only provides coverage against risk arising from an untimely death. A term plan works in the most simple way – On death within the policy term, the nominees get the death benefit while on surviving the policy term, the policyholder gets nothing. The premium paid in a term plan goes entirely towards risk coverage or mortality cost and hence these plans are low-cost, high cover insurance plans. It means by paying a low premium, you can buy a high sum assured (life cover) in a term plan.
If you have financial dependents, buying a term insurance for an adequate sum assured is always recommended as the first step while devising a financial plan. Once purchased, it ensures that the financial goals as and when they arise at different life stages are met by the surviving family members if the bread earner (policyholder) is no more.
Goals such as children education, marriage, buying a home etc are milestones generally met at specific age of an individual. While one saves to meet them as and when they, arise, buying a term insurance ensures they are not derailed if the bread earner has an untimely death. Such life goals are typically met by the time one retires or around the age 60.
So, should one buy a term insurance plan till age 60 or for a longer period? There are some insurance companies offering whole of life term covers as well. “The basic purpose of term insurance plans is to provide financial protection during the working lives of individuals so that in case of their unfortunate demise during this time, their incomes can be replaced and the standard of living of the family is not compromised.
For most individuals, who are employed and will retire at the age of 60 years, a term plan covering them till 60 years may be sufficient. However, self-employed individuals running businesses may want coverage for longer tenures as their productive years may go well beyond 60 years of age,” says Akshay Dhand, Appointed Actuary, Canara HSBC OBC Life Insurance.
“Given the rise in longevity and earning horizon, there is a need to look at the pure term protection plan not just as an income replacement but also as a form of legacy planning. With the changing lifestyle and longevity, long-term coverage helps in income replacement and terms of legacy and estate planning,” says Sanjay Tiwari, Chief Strategy Officer, Exide Life Insurance.
But, if you are using it for legacy planning, it might not serve the purpose always. “On the flip side, if a customer survives beyond 99 years of age, the policy will terminate on the 99th birthday or the policy anniversary will be applicable immediately post the 99th birthday and no further coverage will be provided by the given insurance policy/company,” informs Dhand.
The primary objective of a term cover is to ensure financial dependents are able to maintain their standard of living and for meeting the various goals in life. By around age 60 if you have enough accumulated corpus and a net worth that can support your family for another 3-4 decades, the need for term cover may not be there. “If the additional premium for buying coverage for longer tenures is not as significant as the premiums for shorter tenures, it may be a cost effective proposition for getting coverage for a longer tenure,” suggests Dhand.