Term insurance plans act as financial replacements in the case of your unfortunate demise. However, determining the tenure of this plan is a crucial consideration since the payouts will only be made during this time.
The simplest way to think about this is to ask yourself– how long will your dependents stay financially “dependent” on your income?
If you believe they will stay dependent until you turn 60, then you will need a term plan that covers you till 60. If the answer is 70, then the tenure changes accordingly.
In other words, while availing of a term plan that covers you till 99 years old may seem like playing it safe, it's often a poor choice financially since your dependents may not need the money at all.
All you’ll end up doing is paying higher premiums for coverage your dependents won’t need.
So let’s look at this in a little more detail -
What do we mean by term insurance plans offering 99 years of coverage?
When choosing a term insurance policy, you need to specify the desired coverage age. Some providers offer plans up to 99 years, known as whole life insurance. However, we do not recommend this.
The question is why?
Term insurance plans offering 99 years of coverage: Do you actually need them?
Providers often advise opting for term insurance until you turn 99 since that is where they stand to make the most money. The higher premium you pay will directly contribute to their commission. This is why your plan's tenure must depend on your dependents and dependents alone.
Here are a few cases that reflect the same -
CASE 1: Shreya is a 30-year-old, married mother of 2 (4 and 5 years)
Shreya is in her 30s with kids who are below 5 years old. Should she take a term policy cover till she is 99 years old? Let’s find out -
- Policy tenure = 69 years (Since Shreya is already 30)
- After 60 years, her children are = 64 years and 65 years old.
When her children are in their 60s, the need for term insurance as a replacement diminishes. It's more practical for the children to support their aged mother. Even if she passes at 80, a ₹1 crore term cover's value after half a century is questionable. Plans offering 99 years don't make a lot of sense here. Instead, the best tenure is 30-35 years at most.
CASE 2: Heena is a 30-year-old, married woman with no kids
- If Heena is working, has a spouse, and has no plans for kids, a term insurance plan doesn't make much sense. Instead, she could focus on simultaneous savings, investments in mutual funds/stocks, and estate planning.
- On the other hand, if Heena plans to have kids, a term insurance plan until the child turns 35 should suffice, with a maximum tenure of 35 to 40 years.
CASE 3: Shayan is a 32-year-old man with a 30-year-old spouse, a 15-year-old kid and parents who are both 60+
Shayan's financial responsibilities include his parents, kids, and spouse.
- His parents, in their 60s, need coverage for another 20 years.
- The teenage kid requires protection until financially independent, around 35 years. Consequently, Shayan's tenure should be about 20 years.
- His spouse is traditionally cared for by their son, but considering life's unpredictability, a joint savings account could meet her future needs independently.
On average, Shayan's tenure is about 20-25 years at most, not extending to 99 years.
Even after considering various user cases, we can't identify a scenario where a term policy with 99 years of coverage is logical, rational, or necessary. If you're still advised to choose term insurance with tenure until 99, remember the following:
Things to remember if you plan to purchase term insurance plans offering 99 years of coverage
- When you are 60+, it’s your children supporting you and not the other way round
Once you turn 60 and surpass your retirement age, your likelihood of having dependents significantly decreases. Without dependents, the necessity for your term insurance plan also diminishes. Typically, your children, now ex-dependents, financially support you. Even if you desire financial independence, your savings can prove to be a more suitable option to support both you and your spouse.
2. Your premiums for the later years could have been put to better use
One key highlight of term insurance policies is their pocket-friendly premiums. For instance, a 30-year-old, non-smoker, would pay around ₹10k for a ₹1 crore coverage. However, this plan serves as a substitute during your working years. Post-retirement, redirecting the same premium to better use—such as savings, real estate, estate planning, mutual funds, stocks, or business—becomes more beneficial.
3. Your corpus wouldn’t be of much value after 30-40 years. Think inflation.
Individuals often believe that opting for a term insurance plan with coverage until age 99 allows them to leave a "legacy" for their children, even if the corpus isn't needed for financial survival.
However, considering the headline inflation or the CPI for 2023-24 at 5.4% (as predicted by the RBI), the real value of ₹1 crore coverage for dependents after half a century may not be a significant "legacy."
How to Determine the Tenure of Your Term Insurance Plan?
Term insurance policies are a financial protection tool that doesn’t have a one-size-fits-all approach. Thus, we, at Ditto don’t believe in there being a fixed age till which you “should” have a term insurance cover. The tenure of the plan depends on the estimated time till which your dependents will become financially independent.
So, when determining your tenure please take into account - the age of your dependents, the tenure of your existing financial liabilities (loans, etc.), and your tentative year of retirement.
Please remember that there are consequences to your choices of tenure (primarily because term insurers don’t let you change the tenure of your plan) -
(i) If you choose a lower tenure than what is required -
Neha is a 30-year-old who opted for a ₹3 crore coverage with a tenure of 15 years. Her beneficiaries include her spouse (32 years) and 2 sons (1 and 2 years old).
Neha, passes away, due to natural causes, when she is 50 years old, 5 years after the completion of her term plan. Her husband, who is now 52 years old is nearing her retirement, and her sons, now aged 21 and 22 years old are yet to complete their education.
Neha, who contributed significantly to the family’s financial well-being is now survived by 3 members who are financially weak and could have done so much better with the cover amount from her term plan. But since she chose a plan with a shorter cover of only until she turns 45, her family is left financially unprotected after her death.
(ii) If you choose a higher tenure than what is required -
Soham is a 30-year-old who opted for a ₹1 crore coverage with a tenure of 65 years. beneficiaries include his spouse (28 years) and 2 sons (1 and 2 years old).
Soham passed away due to natural causes when he was 90 years old, thinking he had left behind a corpus for his beneficiaries. However, 60 years after he had opted for the ₹1 crore cover, the value of his desired corpus has deteriorated considerably. Plus, now his children are in their senior years. Soham could have done so much better if he had opted for the term plan till he was 65 and invested the accrued premium amount (from 65 years to 95 years) into real estate or savings.
How do Premiums vary for a term insurance plan offering 99-year coverage & a standard term policy?
Let’s say
Rahul opts for a term cover of ₹1 crore when he is 20 years old. Here is how his premiums vary if he opts for a plan till he is 65 years old or 99 years old. (His yearly income = ₹5 lakhs)
So, as you can see with a higher chance of a payout, Rahul ends up paying almost 4 times the premium amount if he opts for a 99-year coverage. He could have easily used the additional amount to build a savings account, into real estate, or invested some of it into stocks because 79 years down the line (from when he took the policy), would ₹1 crore really be as large an amount as it seems today?
Conclusion
Acknowledging that term insurance isn't universally applicable, choosing coverage until 99 lacks practicality. After 65, with fewer dependents, redirecting premiums to more effective uses, given inflation's impact on coverage amounts, is advisable. Opting for estate planning, savings, and/or investments with the term plan premium is preferable.