Ideal Duration for Term Insurance: Factors to Consider

On February 16, 2025 By newsroom Topic: India Money Advice

The primary purpose of term insurance is to provide financial security to your dependents in case of your untimely demise. The duration should align with the time your dependents would rely on your income. Here’s a breakdown to help you decide:

1. Purpose of Term Insurance

Coverage During Dependency:
Your family depends on your income until you retire or until your financial goals for them (education, marriage, loans) are met.
Once you retire or build sufficient assets, the need for term insurance diminishes.
Not an Investment:
Term insurance isn’t about “getting something back” after retirement. It’s about mitigating financial risk during your earning years.

2. Why Cover Until Retirement?

Dependents Are Secure After Retirement:
By retirement, you should have:
- A sufficient retirement corpus.
- No liabilities (home loans, car loans).
- Grown-up children who are financially independent.
Inflation Impact:
A1 crore term insurance cover may sound significant today, but with 7% annual inflation, its value reduces over time:
- In 20 years: ~?25 lakhs (present value).
- In 40 years: ~?6.25 lakhs (present value).
Instead, your investments should grow at a rate that outpaces inflation.
Higher Premium for Longer Duration:
Policies extending to 70–75 years come with much higher premiums to account for increased mortality risk.
Insurance companies factor in risks effectively—you can’t "beat the system."

3. Should You Extend to 70–75 Years?

When to Consider:
If you plan to work beyond 60 and have liabilities or dependents (e.g., younger children or loans).
If you lack sufficient investments or a retirement corpus.
Why It’s Usually Unnecessary:
After 60, your focus should shift to leveraging investments and retirement savings.
By then, your family should have access to other sources of income (e.g., rental income, annuities, or your accumulated wealth).

4. How Much Coverage Should You Take?

Family Expense Coverage:
Multiply your annual family expenses by 10–15 times (considering inflation).
Example: Current annual expense =10L. Cover =1.5 crore for 20–25 years.
Liability Coverage:
Include outstanding loans (home, education, car) in your coverage.
Example:50L home loan +10L education loan = Add60L to the sum insured.
Increasing Term Plans:
Consider policies that increase coverage over time to account for inflation.

5. What Happens Post-Retirement?

At retirement, your financial plan should ensure:
Passive income (investments, pensions) for living expenses.
No major liabilities like loans.
Dependents are financially independent.
Alternative Post-Retirement Needs:
Use health insurance for medical emergencies.
A strong estate plan (wills, trusts) ensures smooth transfer of wealth.

Recommended Approach:

Duration: Match the policy duration to the years your dependents rely on your income (typically until 60–65).
Sum Assured: Use the Human Life Value (HLV) approach:
Sum assured = (Annual Income × Years Until Retirement) + Liabilities.

Example:

Age: 30.
Retirement: 60 years.
Annual Income:10L.
Liabilities:50L (home loan).
Sum Assured = (?10L × 30 years) +50L =3.5 crore.
Premium: A3.5 crore term plan for 30 years could cost1,000–?1,500/month, depending on age, health, and lifestyle.

Final Thoughts:

Term insurance should be simple and goal-oriented.
- Retire without dependency? Cover until 60.
- Still have liabilities post-retirement? Consider extending to 70 but only if necessary.

Instead of relying on term insurance for long-term security, focus on:
- Growing investments to outpace inflation.
- Building a robust retirement corpus.

By aligning your insurance plan with your financial goals, you can ensure both peace of mind and optimal use of resources.