Term Plan beyond earning age: Is it Worthy?

Indian Life insurance landscape has changed a lot in last 2 decades or so, since the private insurers were allowed to operate in India. There was a time, only LIC was there as a monopoly and in the name of term plan, the product basket was near empty. Yes, those of you, who are old enough and might had purchased, there were plans like Bima Kiran, having Sum Assured ranging from few thousands to single digit lakhs. On top of that, this was a RETURN OF PREMIUM PLAN – ROP.

Look at today, we have 24 life insurance companies as on date (Source) doing business in India. Each one of these are having various combinations of Term Plans. One interesting observation caught my eye. Almost all insurers are now offering Term Plans well beyond the Retirement age in India. Ranging from 75 to 80Y age and few insurers are offering plans up to age 99 to 100.

A basic question to my blog readers and this is also the header of this blog post – Is it worthy to have a term plan going well beyond your retirement age, till 75-80-99-100?

To answer the above question, first we need to answer few associated questions?

  1. Why do we need life insurance?
  2. Why do we need purest form of life insurance – Term Cover or Term Plan?
  3. How much sum assured one needs to have in term cover?
  4. Do we need to purchase Riders along with Term cover?
  5. What premium payment term -PPT, should we have for our Term cover?

Let’s discuss the answers for above questions –

  1. To cover the financial loss, of our income, we bring to our families and dependents, resulting out of our DEATH.
  2. The premium for a high sum assured + investment – combo policy will be so high that We can’t afford to pay. Also it’s advisable to keep INSURANCE and INVESTMENT needs separate.
  3. There are various ways to assign Human Life Value but the most simplistic is to have a Sum assured, which can substitute your income, if the same money is kept in a simple product like BANK FIXED DEPOSIT. In simple words, 15-17 times multiple of your yly income can generate the same income, at current Bank FD interest rates of 6-6.5%. One bonus information, Most insurers don’t offer term cover beyond 20 times multiple of your yly income, taken together your all life insurance policies’ sum assured.
  4. Please avoid riders along offered for a premium with your term plan, as these are neither offering adequate money not cover for the intended use and are very restrictive in their own definitions.
  5. If you are a salaried or a professional with a fixed and predictable monthly income, opt for Regular Premium Payment Term. Limited or Single Premium Payment Term should be opted only by those people who are not sure of their future cash flows.

Here comes the interesting part – Your responsibility towards your family or loved ones’ bright future doesn’t end with purchasing merely a Term Plan and paying it’s premium regularly. No. Purchasing the term plan, is merely the first step. Once it’s taken, the logical next step is to start working on creating a corpus, which is large enough to sustain your dependents in your absence, till your desired time. Once this corpus is in place, answer on your own, do you need a TERM COVER?

In several discussions with people, either over phone calls or in our Facebook group – asan ideas for wealth or one to one chats, one thing I noticed – people don’t see it wrong to purchase term cover well beyond earning age and the primary reason given – this sum assured will help a bit or become a gift, to my loved ones (specially the 3rd generation).

My view – If during your earning years, you could not create enough corpus to sustain your own retirement life as well as to leave some inheritance for your next generation, it indicates a failure of financial planning done by you during your productive years – Active Income Earning Years. Barring few exceptional cases where due to late marriage or late child births or any other special family situations, most people will be able to complete their financial obligations towards family members and loved ones, either through active income already or by creating enough corpus for the intended use, if events are to be happened in post retirement life.

Now Sample this, if a 25Y old person purchase a term cover of Rs. 10000000 (One Crore) till age 100, what’s happening in terms of TIME VALUE OF MONEY? We are aware that INFLATION eats away the purchasing power of our money. On a simple note, if inflation is 7%, the Rs. 100 in our pocket today, will only be worth of Rs. 93 (adjusted for 7% inflation) after 1Y, in today’s value. Please go through the attached excel sheet to notice the impact of inflation over your lifetime for your sum assured.

time value of 1 Crore till age 100

Now answer honestly, how much happy will be your loved ones at your age 100, if you gift them money through your DEATH CLAIM which is equal to Rs. 43274 at your age 25? It can’t even cover your FUNERAL EXPENSES.

 

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2 Responses to Term Plan beyond earning age: Is it Worthy?

  1. RAVINDRAN RAMAN says:

    If Term Insurance is not sufficient ( as is evident ) What would be the SIP ( from Age 25 to age 58 – and also assuming step up in SIP every year ) required to be invested , assuming 7% inflation and average return of 8% pa and current monthly family expenses of Rs 25000.

    Scenario will anyway change if the Insured dies at the age of 45 , the family will be left with the Term Insurance corpus of Rs 1 Cr ( of course ith reduced PP due to inflation !!!!) and
    a Corpus from accumulated SIP for 20 years at 8%pa

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