A term cover is the cheapest and ideal form of life insurance one can buy. A policy buyer often faces the dilemma of how long the coverage should be—till 70, 80, 99 years of age? Is there any loss in opting for a long-term life cover?
Well, life insurance is usually bought for as long as one’s working life, but now, the concept of semi-retirement is in vogue. Many people continue to work well beyond 60. Besides, life insurance proceeds would be like legacy money for the children! Such beliefs often stem from the fact that there are many misconceptions about life insurance as a product.
Understanding the true meaning of life insurance
Life insurance should be primarily bought to cover the potential risk of financial loss caused to the family in the event of the death of the principal breadwinner. It is this fundamental purpose of life insurance, something people fail to understand. The wealth accumulation phase, typically with financial dependants and liabilities, is the period when any potential disruption to income in the event of the death of the primary provider can cause financial stress to the family. So, it is during the earning years that life insurance is most required by an individual.
An individual in retirement ideally has nil liabilities and well-settled children and has a good-enough adequate retirement corpus to enjoy the post-working life. Even if he/she continues to work beyond 60, it is likely out of the desire to stay busy and engaged and not out of compulsion. So, beyond the regular working years, it does not make sense to continue the life cover.
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Long-term cover does not come cheap
Life insurance cover also comes at a steep cost if one continues to pay premiums in retirement. Consider this real illustration.
A 35-year male, non-smoker, plans to buy a Rs 1 crore term plan online from HDFC Life.
The annual premium till the age of 60 is Rs 16,600. If he stretches the policy until age 70, he ends up paying Rs 21,960, 32 percent more than what he would pay for the cover till 60. If he extends the term further till 85 years of age, the difference rises by 68 percent to Rs 27,850, compared to coverage till 60 years of age. The higher premium holds true for all life insurers. For ICICI and Kotak, the increase in premiums is even higher at 77 and 74 percent, respectively, if extended till 85 years.
This clearly shows that the longer one stretches the life cover beyond working years, the higher they premium outgo.
Insurance—a probability business
Insurance companies work on the basic principle of probability and law of averages. To assess the probability of risk of policyholders dying at different ages, insurance companies rely on mortality tables to price in the premiums.
As observed in the table above, the probability of people before attaining 60 years of age is less than 1 percent. It is less than 5 percent up to 75 years. From 80 onwards, it escalates rapidly. To account for a higher mortality risk, it is obvious that insurers would peg a higher premium rate for individuals in their 80s and above.
The opportunity lost and its cost
When it comes to deciding the term of life cover, opting for the longer tenure beyond working years is not a prudent decision. Not only do they end up paying high premium, they also lose out on the opportunity cost of investing that additional premium in suitable alternative options. Ideally, one should get a term policy cover for till 60-65 years’ age at the most.
For instance, continuing with the illustration above, if the 35-year individual opts for a term plan that covers him till age 60 rather than 85, he saves Rs 11,250 per annum for 25 years of his working life (60 minus 35). If he invests this savings annually for 25 years and then stays invested for another 25 years (between the ages of 60 and 85), the corpus would grow to a whopping Rs 1.3 crore assuming a 10 percent annual return. Imagine how this corpus would be useful to him in retirement age to meet his sustenance and healthcare costs, instead of locking in the money into paying premiums.
Today, the average life expectancy has increased due to advances in medicine and healthcare. So, what one needs is not a longer life cover in retirement but an adequate corpus to be financially independent. Considering this, it is clear that paying additional term life premiums in retirement beyond working years is a losing proposition.
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