Policyholders generally treat term insurance as a hassle-free financial product. The policy is signed up, premiums are paid annually and the instrument needs no more upkeep to function efficiently. This may be true in a shorter span of 4-5 years. But when applied to longer time-frames, term insurance needs periodic revisits to check for sufficiency of cover-age.
Term insurance covers your cumulative future income and liabilities. The two factors can change significantly in the long term, and so should the respective term insurance covers. Here we look at the three stages in a policyholder’s life and the appropriate term insurance cover for those periods.
Start Early
Term insurance should be initiated at the beginning of one’s career. At this stage, the burden of financial dependents or large financial liabilities (apart from college loans) is lower. But income generation would have started and term insurance to cover such assets should be star-ted.
But the size of the cover may be larger than the human life value which is the sum of financial income and liabilities. This must be analysed based on the additional cover versus the increased cost of premium. A larger cover can be considered because income will most cer-tainly increase at a faster pace at the beginning of one’s career than in later years. Though fin-ancial dependents and liabilities are minimal, they most certainly will be accumulated through the years.
But the main reason for an outsized term cover in the younger years is the cost differential. A Rs. 1 crore term insurance for a 20-year-old male costs Rs. 6,000-7,000 per year compared to Rs. 9,000-10,000 per year for a 30-year-old male. Term insurance locks in the price for the Rs. 1 crore cover for the rest of your life. The premium difference for the larger cover will weigh on the pocket initially but will be aligned to your financial situation later, and will be locked in at a lower price.
Step-up in Cover
A larger cover at a younger age should cover the increasing income. But the term cover should accommodate dependents and financial liabilities that are accumulated in the middle years. A child’s educational needs or medical costs for the elderly will increase as one enters the middle years. The term insurance plan should not only replace your income in case of eventualities but also ensure financial support for family members. On taking a significant liability – home loan for instance – protection measures against failure to meet that liability can be achieved with a new and matching term loan. Also, policyholders should raise a new term insurance equal to the value of the home loan or higher.
Higher covers would ensure that any interest accruals in any eventuality are also met with, but the minimum should be equal to the current value of liability.
In effect, when a bank disburses a home loan, they also would follow up on term insurance aimed at the liability which is a home loan insurance. But it is prudent to pair your new home loan with a new term insurance and not a home loan insurance. The death benefit accrues to the family in term insurance compared to accruing to bank towards the remaining home loan in the latter.
Unwinding
During the silver years when one retires, when family obligations are met and liabilities have been taken care of, term insurance plans can be wound up. The income generation for the eld-erly would likely be from financial assets (FDs, retirement plan drawdowns, rents or equity dividends) which are not human-based and need no protection from a term cover.
However, one should address two primary aspects. One is the financial dependents including a spouse, and the financial legacy left behind for the next generation. Term insurance covers can reach up to 100 years of age and retirement age starts around 6065 years. This implies that 35-40 years of no safety net can be worrisome for dependents in which case term insurance can still be useful. The same can be applied to leaving behind a financial legacy.
