Continuing our previous article on the policy payment term to be selected, we will continue from the second question that is often asked. “Should I buy insurance till 85-90 years of age, as it guarantees that our nominee will get the sum assured?”
As already
seen in the Part 1 of the Perfect recipe for Term Insurance, the time value of
money plays a major role in calculations of premiums and payouts. Coming
straight to the point, let me ask you if an insurance payout by the time you
reach 85-90 years of age, enough? Let’s calculate.
What you pay v/s what you get?
I have
compared the plans from Max Life insurance for a 25 Years old non-smoking male.
There are 2 plans that I am comparing, one offers insurance till the age of 60
Years and another till the age of 85Years. Shown below are the premiums for
both of these.
|
Sum
Assured |
1,00,00,000 |
|
|
Age (In
Years) |
25 |
|
|
|
Plan 1 |
Plan 2 |
|
Cover
Till Age |
60 |
85 |
|
Premium |
₹ 8,754 |
₹ 12,413 |
Now the
premium for Plan 2 is almost 40% costlier than Plan 1. As the probability that
a person will die before reaching 85 is higher than that that of the death before
reaching 60 years of age, insurance companies charge higher premiums to
compensate for the additional risk.
To Consider or Not to Consider?
I have done
some calculations considering an inflation of 5%, I have arrived at the present
value of all the payments to be made and the expected value to be received. You
can refer to my calculations here.
|
|
Plan 1 |
Plan 2 |
|
Value of
all Premiums Paid in today’s terms |
Rs. 1,50,507 |
Rs. 2,31,941 |
If you save
the differential premium amount, every year at the rate of 7% by the time you
reach age of 85, you would have accumulated Rs.35.30Lacs, which you (or your
nominee) will receive. On the other hand, if you go with Plan 2, your nominee
will receive Rs.1Cr. Thus, buying longer tenor will be beneficial if the
insured person dies between the age of 60-85 years, wherein the nominee can gain
anything between 18Lacs to 9Lacs in terms of today’s value depending upon the
age at the time of death. This is hardly anything that will have an impact the
fortunes of your loved ones. On the other hand, if you outlive 85 years of age
or die before 60, there’s much to lose, on account of not getting anything or
getting the same payout despite paying higher premiums.
Buying a term insurance is extremely personal issue and depends upon multiple
factors, if you expect that you will have dependents even at the age of 85 - 90
or 100 years of age you should buy insurance for that tenure. If you expect
your liabilities/dependency to end by 50, no need to buy insurance even beyond
50. It’s your requirement which should decide it.
For me, I have
taken term insurance till 65 Years of age, by when I expect my family's financial dependencies on me will end. I will use the premium saved will be used to buy another
term insurance of shorter tenure may be from age of 33-60 of another 50-60Lacs
when my responsibilities are highest specifically due to Child education.
Tips to buy Term Insurance:
- Don’t try to profiteer from your life insurance. Insurance companies have access to far too much data and resources to design products so that they don’t end up in losses. You are betting against them just for a small gain. Just buy what you need for how long you need, and focus on wealth building somewhere else.
Feel free to share your queries or comments regarding term insurance through e-mail or drop a message @Money.Matrs.
To invest in
equities, bonds and other instruments, you can open a demat account with Upstox
by clicking here.
You can also
purchase direct mutual funds through KUVERA, click here to signup.
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