Got a term plan for your family? Or maybe you’re planning to take the term plan in a few days.
If you are, good for you! One of the biggest questions, every person considering term insurance has, is – “Should I take the cover for the maximum period?”.
We provides coverage up to 85 years of age. or 20 25 30 35 40 years. I am confused about which policy term is better to get maximum benefits?
Just like him, hundreds of investors have asked me this question over and over again, and I tell them, “Just take it only until you reach 60 years of age.”
And they happily ignore my suggestion; as if I am crazy, suggesting this to them. The “Insurance only till 60 years” looks kooky to them – kind of a “wrong deal” and they want to get “maximum benefit” out of the term plan.
“The chances of my family receiving the claim amount is higher when I am covered for long” is the common thought process of every person who is in the mad rush of buying the highest possible tenure.
Trust me, that’s flawed thinking and I will explain why today. More than a sermon, think of this article as a discussion, where I put some points in front of you and you reflect and ask yourself – “Does it make sense? or not?” and then make your own decision. So here are those 5 reasons– why you should not take Insurance till the age of 85 years or more
1. You don’t need it beyond your working life
You need to ask yourself the question – “Why am I taking Life Insurance?” and the answer is – “Because right now, I don’t have enough net worth, which will help my family if I am gone” or in other words – “Because my family is financially dependent on me.”
For a person who is not earning and does not bring money home, his death will cause family only emotional loss; not financial loss. Hence, logically you need to cover yourself through a life insurance product, only for the time you are working and others are financially dependent on you.
2. You will have “probably” have enough wealth by the time you retire anyway
Stretching the 1st point, if you are taking life insurance cover until you are 75-85 years, will you need it at that time? Do you feel that you will have any reason to have a cover of 1 crore that time (after 30-40 years)? I am sure (more confident than you), that you would have completed all your financial goals by that time, you will have your own home by that time and you will have done everything in your life by that time.
Your focus area at that old age will be very different than what you focus on right now.
To understand this point, you have to stop for a moment and go into 2040-50; when you are retired and close to heaven’s door.
Are your children financially dependent on your income – which does not exist? Is your spouse depend on your income? You must have already accumulated enough wealth by that time and you must be getting some income out of that.
Your death has nothing to do with family cash flows at the time.
3. The premium factors in your tenure already
Most of the people who feel that they are smart enough to take a term plan till 85 years, forget that on the other side is a professional business running for decades now.
They have hired people who are 10 times smarter, who design products (they are called Actuaries) that generate large profits for companies and not investors. Life Insurance is a “for-profit” business. They design things so that they earn profit.
If a company allows you to make a plan that lasts until you turn 85, why have they done that? Why did they allow that to happen? The premiums they charge already factor in everything. You pay premiums to get that term plan, it does not come free!
4. The value of your sum assured is peanuts later
I hear it most of the time – “I am taking the term plan till 85 years so that even if I die, my family will get the money. So, the higher the tenure, the higher the chances of making money.”
But they forget that by doing so, they are helping the insurance guys make a profit, but let’s say you die at 70 years. Celebrations! Your family will get that 1 crore, which at this moment sounds good, but will not be worth a lot that time.
Let me show you the mirror that lets you look into the future
Let’s say you are a 30-year-old guy, and your monthly expenses are 40k per month. You say to yourself, “Let me take that term plan worth 1 crore so that in case, I die my family can get 1 crore which will provide them some good monthly income.”
It would be a very good number if you die early in your life! With each passing year that 1 crore will be worthless. If you die the next year of taking the term plan, the worth of that 1 crore is pretty much the same, 1 crore.
But if you die after 10 yrs, that 1 crore will be worth 50 lacs in today’s world. So, getting 1 crore after 10 yrs is the same as getting 50 lacs right now. Are you getting my point? The money you get in the term plan is a constant number, not linked to inflation!
So, imagine you have taken the term plan till 85 years and you die at 70 (after 40 yrs of taking the term plan),
what is the worth of that same 1 crore at that time? Hold your breath! It’ll not more than 6-7 lacs assuming an inflation of 7% and even if inflation for the next 40 yrs is a small 5%, it would not be worth 15 lacs today! So, when your family gets that 1 crore after 40 yrs, it’s kind of worthless.
No one would be depending on that money anyway; it’s just a bonus on your children’s inheritance money!
Act like a real informed and smart investor
I have been seeing this madness for many months now and was constantly wondering why people are focusing so much on this small thing called “long tenure” in the term plan.
I see investors abandoning one insurance company for another just because the other company is offering a term plan for 75 years.
You are allowing yourself to fall into a trap if you do this. If you have already taken the term plan for 85 years, do not worry … do not cancel it, just let it run its course.
Stop paying premiums when you feel that your family can be taken care of, by the wealth you have generated.
If you are planning to take a term plan right now, take it for as long as it takes you to retire, probably till 55 to 60 years, but not beyond that.
Would be happy to hear your thoughts and your views on this topic! You have taken the term plan for very high tenure.