What should be the duration of a term insurance plan?

Posted by: Girija Gadre, Arti Bhargava and Labdhi Mehta on Feb 27, 2017, 06.12 PM IST

Kavish is a 33-year old accountant with a family of three. Since the birth of his child, he has been thinking of reviewing his life insurance needs.

He wants to increase the sum assured and term of the policy, in view of his added responsibilities. He has been approached by an agent who recommends a plan that will cover him till the age of 80.

There are other options with durations varying between 50 and 70 years of age. He feels he should opt for the longest possible duration as buying a policy when he is much older will be very expensive and difficult.

Kavish obviously wants to get the most out of his life insurance cover and feels the longest duration (80 years) provides that. Actually, the answer to his predicament lies in the purpose of life insurance, which is to provide financial support to his dependents and family in his absence.

Would he really need to support his family at that time? Wouldn't he have already accomplished all his financial goals by then-child's education, marriage, house and a sizeable retirement corpus? By then, he and his wife should be living off it.

The duration of Kavish's term plan solely depends on when he sees himself accomplishing his major financial goals. If he can achieve that in 10 years, he requires a term plan for 10 years only.

Kavish must realise that with the passage of time, the family grows independent or less dependent, financially, on him. So why must he pay a higher premium for a longer duration?

Obviously, the longer the tenor of the policy, the higher the sum assured he will need (taking inflation into account). Both these factors would lead to a higher premium.

It is not advisable to take the maximum duration available. In fact, if Kavish should lose sleep over something, it is his retirement planning, since that is going to come in handy for both him as well as for his wife at that later phase in life.

He must ensure that he maximises the amount he saves for building a retirement corpus. Thus, he must take a considered view as to when his dependents will cease to be his dependents. His term insurance policy should expire around that time.

At the same time, he must ensure that he has a good corpus for pension by the time he retires from a financially active life.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) This article appeared in Economic Times dated Feb 27, 2017, 06.12 PM IST