There are two key factors to consider while purchasing a term insurance plan –
a. What should be the term insurance cover?
b. What should be the duration of a term insurance plan?
Both these questions should be evaluated with equal consideration. In this article, we will evaluate the second question listed herein – i.e. the term of your term insurance plan. Just as with the other aspects of insurance, there is no ideal answer to this question. The answer to the question depends on factors such as your present financial situation, your liabilities, your current age, the retirement age you have in mind, etc.
Think of a term plan as an umbrella you will need as long as it rains. Therefore, the duration of your term plan should ideally equal the number of years your family is likely to depend on you financially. To put things in perspective, ask yourself the following questions:
a. What is the corpus required to service outstanding liabilities?
b. Is the amount left post servicing debts adequate to take care of my family’s immediate needs including taking care of recurring monthly expenses?
c. What financial difficulties will the family face if I am not around?
d. What are the large one-time expenses likely to crop up in the future – think child’s education, marriage, etc.
With these aspects in mind, evaluate the following factors carefully to determine the duration of your term insurance plan. Inadequate term insurance both in terms of the duration of the term plan and the amount covered defeats the purpose of owning a term plan.
Liabilities: The duration of your current outstanding liabilities should be considered before determining the term of your insurance plan. If you have a home loan outstanding for 15 years, then your term insurance should be taken up for a minimum duration of 15 years.
Affordability: Term insurance plans with longer time horizons tend to be more expensive. If your current finances do not permit taking up a higher premium and if the premium amount is straining your finances, you should look at adjusting the tenure and the coverage amount such that you strike a balance while not losing out on the benefits of term insurance.
Length of Support: Your family profile is a huge determinant of how long you should hold on to your term plan. If your child is currently 5 years old, you will need to plan to support him/her until he/she has completed their education – read post-graduation. In this particular case, you will need to plan for the next 18 – 20 years. If you are looking to support your child for other key milestones such as marriage, then the duration of the plan should be extended further.
Commitments and dependents: What is worse than leaving nothing behind for your family? Leaving a debt pile for the family to fend. If you have accumulated debts, are the only earning member of the family, have young dependents, then you will have to consider planning your retirement in a manner where you can service your liabilities during your working life. And in the event, you are not around, your term insurance plan should do the job for you.
Current Age: Insurers provide different periods for a term plan ranging from 15 years, 20 years, 25 years and up to 30 years. If you are a 25-year-old, you can avail a 30-year term plan. However, if you are a 35-year-old individual, you can only avail a 25-year term plan and not a 30-year term plan. Also, if you choose a term plan that ends much before your expected retirement age, the whole purpose of term insurance is defeated. For example, you are currently 30 and plan to work until the age of 55, if you opt for a 15-year term plan, the plan will expire when you are 45. You are least likely to need protection until before the age of 45. Also, if you decide to go for a new plan at that point in time, it will cost you a fortune in the premium to be paid. Therefore, opting for a long duration at a younger age is advisable.
Insurers offer different term insurance plans with varying benefits at different price-points. Besides, considering the factors discussed above, you will do well to compare your term plans online and make the best choice based on your individual needs.