This is a long article, but we promise you it is worth reading. Say you are 35 years old and want to buy a term insurance policy. Many companies even offer life insurance cover till you are 75 years of age. Sounds very tempting and logically the right thing to do, isn’t it? But before you decide to go ahead with such a high cover period, spare a few minutes on this article and let us know if you are still not convinced.
Term Insurance policy is not recommended for a period that covers you beyond age 60 (65 in some cases) under any condition. We have listed these below.
- Term Insurance policy when bought to cover your income contribution – If you are salaried, income will be earned till you retire from your organization, i.e. till you are 58 or 60 years old. So it is enough to have term insurance until age 60 years because after that there is no income to be covered! If you are self-employed or a professional, you may work for a few years more, say up to 65 years. In such a case, you could have term insurance until age 65 years.
- Term Insurance policy when bought to cover your family’s expenses over time – Instead of using income method, some of us calculate term insurance needs using an estimate of our current expenses and then expanding it over time. Now expenses don’t stop at 60, they go even beyond till we die, sometimes as much as up to 90 years, right? So wouldn’t it be a good idea to take term insurance for as high a term period as possible? No. That’s because if you live until 60 years at least, you have already earned all the money that you could ever have, which is what will be used for your retirement age. So where is the question of protecting yourself from death beyond 60 years?
- Term Insurance policy when bought to cover your liabilities (loans, etc.) – Loans (home loan, personal loan, etc.) are given generally to salaried class and the maximum period of the loan repayment is capped by your retirement age. This is because after you retire there is no income, so where is the question of paying EMIs? That means all your liabilities will end at retirement age. So should your term insurance policy.
- Term insurance policy is ‘not worth it’ when chosen for a long period – To explain this we will get down to some calculations. We promise you this will be an eye-opener for many of us.
Let us assume you are male, 35 years age, non-smoker and want a cover of Rs. 1 crore. Let us take the rates for the recently launched LIC Online Term Insurance Policy e-Term. LIC offers life cover till 75 years, but not more than 35 years of cover period.
– For a term of 35 years i.e. cover till age 70, the all-inclusive premium is Rs. 30,562 per annum.
– For a term of 25 years i.e. cover till age 60, the premium is Rs. 21,798 per annum.
You will notice that the difference is substantial. Anyway, let us proceed to find out if it is worth it.
Life Insurance cover is constant throughout the policy period. So whether you die at 36 or 63 or 73, you get the same – Rs. 1 crore. It is important to understand that with time, the value of money reduces drastically.
Premium paid at age 35 is Rs. 21,798.
By age 36, you have actually paid 21,798 x 2 = 43,596. But since you paid 21,798 more than a year ago, the real value is 21,798 x (1+12%) + 21,798 = 46,212. This is because if you had not bought a term plan at all, the first year’s premium would have got your returns @ 12% (assuming equity returns) after 1 year.
By age 37, you have paid 21,798 + 21,798 x (1+12%) + 21,798 x (1+12%) x (1+12%) = 73,555, i.e. returns for 2 years on 1st premium, for 1 year or 2nd premium, … and so on. This is explained in the table on the left.
So by age 60, your ‘investment’ in premium (@12%) is worth Rs. 32,76,979 for a Life Cover of Rs. 1 crore. Still a worthy investment if you die. And if you don’t die, you know what it is worth. But why take the chances, right?
Great. Now let us look at what happens if we had taken a term of 35 years, i.e. life cover till age 70. Have a look at the second table.
Going by similar calculations, by age 60, your ‘investment’ in premium is worth Rs. 45,94,506 for a Life Cover of Rs. 1 crore. IS IT REALLY WORTH? We are not sure knowing that the 1 crore comes back ONLY if you die!
From here on, it gets even worse. At age 67, your ‘investment’ in premium becomes worth Rs. 1,04,65,329 for a Life Cover of Rs. 1 crore! So even if you die, you get back only Rs. 1 crore! i.e. lesser than the value of the premium that you have paid! If you die at 70, what you have paid is Rs. 1.48 crores and what you get (that too if you die) is only Rs. 1 crore!!! Hahaha! And the value at age 75 is ridiculously unbelievable!!!
We think we know what you will try to do now. You will start calculating this for YOUR age, YOUR policy, YOUR Sum Assured, and for some other rate instead of 12%. It does not matter how you do it – LONGER THE TERM, LESSER IS THE TRUE WORTH OF YOUR TERM INSURANCE POLICY! As simple as that. And more importantly, beyond your earning years, there is no logical reason to have a term policy, it is only a BET on your Death!
When does this principle not work : This does not work if (1) you are choosing an extremely cheap plan or (2) you are a risk-averse person, do not invest in equity and believe that long-term returns will be less than 8%, or (3) if both are true at the same time. But irrespective of that, the theory stays true for everyone – beyond your retirement age, it is conceptually a bet on your death!
Mortality Rates in India are going up, so you will live much longer – Indians are already living up to an average age of 75 and this number is going up by almost 4 years with every Census (conducted once in a decade). This is because newer medicines and healthcare technologies are helping us recover from diseases and ailments which were till now either not curable or not detectable early. Also, today, facilities are both available and affordable. So you are indeed likely to live till a long age.
So be a smart and informed investor – save money in creating a fund to meet regular expenses after Retirement, or to manage your Health Insurance costs, but not for betting on your own death!