Sunday, 5 June 2016

Why Term Insurance Policy is required till 60 years

There are so many term insurance plans in India right now which offers insurance for age up to 75 - 80 years, but the question is "Is it not good to have a look at why should you buy term insurance up to 60 years or retirement year which ever is earlier" 

If you are buying a Term Insurance Policy you should read this article and I promise you it is going to be worth reading.
Imagine you are a 35 years old and want to buy a term insurance but before that you should check how much insurance do i need, I have seen many companies providing life coverage up-till 75 years of age which may look good but in reality it is not because the real fact is you end up paying more than the sum insured.
I would not recommend term insurance policy for a period that covers you beyond age 60 (65 in some cases) under any condition. I have mentioned the points below

Income Contribution

Insurance is a risk mitigation tool for your income whether generated through salary or business. If I had to ask you how many years you are going to work, your answer would be around 60 or 65 which is the normal retirement age. This indicates that your term insurance should be up-till the time you are going to retire. In such a case, you should have term insurance up till your age 60

Must Read : Why Real Estate is and always was a Dull Investment

Death beyond 60 Years
Another question comes up here is what if you live longer than 60 years?
Since you started earning from your first job or business whatever the case may be, you have to accumulate wealth by the time of 60 which would in turn should meet the expenses towards your post retirement. After 60 years you would be having income from wealth generated so where is the question of protecting yourself from death beyond 60 years

Term Insurance policy when bought to insure your liabilities (home and auto loans, etc.)
Out of liabilities (loans) like home loan, car and personal loans etc. home loans has the longest tenure may be 20 years or 30 years depending on what you select. Banks mostly now a day includes home loan insurance as they have tie-ups with insurance companies and in event of death the proceeds of the home loan insurance policy payoff the balance amount to the housing or finance company who provided you the loan. Most banks provides you a loan which is capped by your retirement age, this is because once you retire there is no income hence no question of EMI Liabilities. It simply means your liabilities end as soon as you reach your retirement age

A policy like term insurance is not at all worth when chosen for a longer period:
Let me explain you with calculations below

For our Example I have taken a case where you are male, 35 years of age , nonsmoker and life cover of Rs 1 Crore.

For a term insurance of 25 year I mean cover till age 60 premium is Rs 12878/-
Life Insurance cover of Rs 1 Crore is constant throughout the policy period. So whether you die at 45 or 55 or 65, you get the same – Rs. 1 Crore. It is important to understand with time, the value of money reduces drastically.
 Premium paid at age 35 is Rs.12878.
(premium amount from for ICICI Prudential Life Insurance) 
 By age 36, you have actually paid 12878 x 2 = 25,756. But since you paid premium more than a year ago, the actual value is 12878 x (1+12%) + 12878 = 27301. This is because of the opportunity cost, the cost of investing in a particular product and therefore forgoing the potential benefits of other product, in our case it would be investing in Mutual Funds with a return of 12% per annum.

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By age 37, you have paid 12878 + 12878 x (1+12%) + 12878 x (1+12%) x (1+12%) = 43456, i.e. returns for 2 years on 1st premium, for 1 year or 2nd premium, … and so on. This is explained in the image below

Term Insurance for 60 Years
From the above image it is clearly visible that at the age of 60 your premium paid @12% is worth Rs 1717074
Still a good investment if you die (but who likes to die) and if you don't die,you know how much it is worth now,but why take risk ?

Good, Now let us take a look at below table where you have taken a risk cover of 75 years and premium paid is for 40 years with a premium amount of Rs 19,027
Term Insurance For 75 Years

With the same calculation, by the age 60 you would have paid a premium of Rs 2536944,do you really think it is worth?   
Well, at the age of 72 your investment in premium amount becomes worth Rs 10343052 for a life cover of Rs 1 Crore, If you die after 72 years your nominee will get Rs 1 Crore in-spite of paying more premium.

Longer the tenure, Lesser is the actual worth of your term insurance policy! As simple as that and after your earning years there seems no logical reason to have a term policy, it is just a bet on your death!!!

Note : The above may not work if 
a) your premium is too low 
b) Being a risk averse person you are not interested in equity and your rate of interest is around 8% or may be even low 
c) both a & b 
But the fact remains that after your retirement age it is just a bet on your death!!!

I would suggest you to take a term policy for 75 years because i have seen many people who have lost their fortunes due to bad phases in life,you can anytime stop the premium at the age of 60 if you have accumulated wealth and if something goes wrong then let it continue up to 75 years. 

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via SIP in best 3 equity mutual funds in India for Retirement

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In case of any further explanation you can reach me on or tweet me  @vipuls1979

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