A few days ago, one of our health insurance clients called our advisors and offered great feedback, saying he was pretty happy with the plan we had suggested. Now, he wants to purchase a term insurance plan for himself. He asked us about the best term insurance plan to suit his requirements.

And we asked him a few questions -

“What is your age? What kind of financial obligations do you currently have? How many dependents do you have, and what are their ages? And what does his financial bandwidth look like (to pay the premium)?”

He answered all and then said he wanted ₹2 crore coverage until he turned 70. We asked him how he was so sure about the term insurance coverage amount and the ideal term insurance policy period.

He said it was a rough assumption based on what his cousin had availed for his family.

Our advisor replied, “We get your reasoning Sir. However, this is a common oversight by potential policyholders. Ideally, your IDEAL term insurance policy tenure and sum assured need to be computed. Assumptions can be detrimental to your financial health and aim since your ideal sum assured should cater to your customised requirements/goals.”

He sounded confused, and we realised we needed to explain why he needed an ideal policy period for term insurance plans!

Here’s what our advisor explained -

Heads Up: It takes an average person up to 5 hours to read & analyze a policy, and 10 hours or more to compare different plans and make a decision.
This is why we propose a better alternative - taking a 30-minute FREE consultation with Ditto’s certified advisors. We have a spam-free guarantee, and we’ll never push you to buy a plan. Don’t delay this - we have limited slots every day, so book a quick call here before they run out.

What is the Ideal Policy Period for Term Insurance Plans?

Term insurance policies are a financial protection tool meant to act as a long-term commitment between the insurer and the insured. The sum assured (also called the death benefit) comes into play in the event of the policyholder's death. The amount so gained can be used to fund diverse expenses involved in ensuring that the policyholder’s dependents are able to achieve either life stage goals without any financial hiccups in the unfortunate demise of the insured individual.

Now, when you decide to purchase a term insurance policy, there are two vital factors that you need to consider before you approach the best term insurers for a suitable policy. These two factors are -

  1. The ideal term insurance policy period
  2. The ideal term insurance sum assured

What you need to understand is that when you think of a term insurance plan, one size doesn’t fit all. Your financial requirements, bandwidth, and goals will differ from those of any other individual. A lot rides on your eligibility & requirements -

  • Current age,
  • Income slab,
  • Medical conditions,
  • Educational qualifications,
  • Lifestyle and hobbies,
  • Existing loans and other financial liabilities,
  • The number of children you have and when they will become financially independent, and
  • The financial status of your spouse.

Apart from this, you also need to think about the time till which you need the coverage to stay active. So, how can you calculate the ideal policy period for your term insurance plan? Here’s what we suggest -

Why Should You Determine the Ideal Policy Period for Term Insurance Plans?

Currently, there are several term insurance plans offered by top term insurers that provide policy coverage till you turn 99 or 100 years old. These plans are called whole life insurance policies, and while they sound like a safe umbrella approach to purchasing a term insurance plan, they might not be the best option.

Think about this: You purchase a term insurance plan so that it can act as an income replacement, and in the event of your unfortunate absence, the short-term and long-term financial goals can be met. Once you retire, do you really need to pay the premiums till you are 100 years old? Moreover, such policies require you to pay pretty high premiums since the insurer is aware of the high risks of death benefit payout (life expectancy continues to deteriorate over the years).

This offers clarity on why you need to calculate the ideal term insurance policy tenure. Now, coming to how to determine the ideal term insurance policy tenure -

How to Determine the Ideal Policy Period for Term Insurance Plans?

Term insurance providers aren’t too keen on offering flexibility across their plans once the policy has been purchased. While there are a few term insurance riders that offer to tweak the policy a bit to suit your evolving requirements (that couldn’t be predicted), not all features can be changed. One such feature is the term insurance policy tenure. Hence, you need to choose the ideal tenure for your term insurance plan during the purchase.

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To calculate the ideal policy period for your term insurance plan, here are a few factors that you need to consider –

  1. Age of the policyholder - If you are purchasing a term insurance plan when you are 25 years old, your policy tenure can be anywhere from 35 to 40 years. But, if you are purchasing a term insurance policy when you are 35 years old, the ideal tenure can be between 25 to 30 years.

While this is not a single solution based on your age slab, your age definitely impacts the tenure of your plan. If you take a closer look, you’ll see that we generally recommend that your term policy covers you till a few years after your retirement age.

However, this range of tenure varies from one potential policyholder to another. Hence, often, the best approach is to contact an insurance industry expert and ask for guidance/consultation.

  2. Age and number of dependents - A term insurance plan is supposed to offer financial aid to your dependents in the case of your unfortunate absence. However, such policies are crafted to offer financial aid to your children till they are financially independent and extensive support to your spouse. The sum assured offered is best not considered as a financial legacy.

Hence, the age and number of your dependents are extremely crucial when determining the ideal term insurance policy tenure.

  3. Existing financial obligations - Say you have an ongoing home loan. If you pass away before completing the home loan repayment, you will need a substantial sum amount to kick in that can cover the cost of the residual EMIs. Often, this might be a contributing factor when choosing a term insurance plan.

On the other hand, when you are purchasing a term insurance policy, in both cases - selecting the sum assured or choosing the ideal policy tenure, you need to consider the home loan EMI amount and the home loan policy period.

  4. Current financial bandwidth - Although the term insurance death benefit is paid out as a lump sum, it can be used to run the monthly household expenses if you take the same into consideration when computing your ideal monthly/yearly expenditures. Now, while it is true that such initiatives will help you arrive at the ideal sum assured for your term insurance policy, you also need to remember that the higher the sum assured and policy period, the higher the premium.

So, while term insurance policies are usually affordable, when choosing a term policy tenure (and sum assured), quickly calculate the approximate premiums. This will help you make sure that the policy you plan to buy isn’t digging a hole into your pocket or blowing your budget out of proportion. While choosing a high sum assured can result in this high–end premium, so can choosing a redundantly high policy tenure.

This is because the higher the age until which you are covered, the higher the payout risk posed to the insurer. Subsequently, you will be looking at higher premiums (consider the case of whole life insurance policies and how high their premiums are as compared to standard term insurance policies, wherein you seek coverage until you turn 65 or 70).

  5. Policy purpose - The reason why you purchase a term insurance plan often has a substantial influence on deciding the ideal term insurance policy tenure. Let’s take a few cases to understand this better -

  • CASE 1: If you are a single person with no plans of getting married and have no dependents apart from your parents -

Your term insurance policy period should ideally be based on your dependents, and since that’s your parents, you can start looking for shorter-term insurance policy tenures.

In this case, your ideal policy tenure will be determined by two things: the age of your spouse (their income status) and the business in question (if you have taken out any loans for it and the years required to repay them).

  • CASE 3: If you are a married person with no plans of having a child and have a home loan

In this case, your term insurance policy will have a couple of things to consider: the age of your spouse and child and the tenure of the home loan. The policy must stay effective until the child is financially independent and the home loan has been repaid.

  • CASE 4: If you are a married person with 2 children and a spouse as your dependent

While computing and deciding on your ideal term insurance policy period, your expert insurance advisor will consider the age of your youngest child (since he/she would take the most time to become financially independent) and the financial independence of your spouse.

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Conclusion

Purchasing a term insurance policy can be the best financial initiative, considering its affordability, convenient access to a substantial cover amount, and the flexibility offered via term insurance riders. However, whether you can tap into its complete potential and gain your penny’s worth depends on the choices you make when choosing the cover amount and tenure (apart from its features and riders, of course). So, please make sure that you don’t end up guesstimating the ideal policy tenure or choosing a redundantly longer one (leading you to pay higher premiums since the risks of payout are higher) or a shorter time (since your family will be left financially vulnerable and the term insurance so availed will prove to be useless).