How to decide life insurance policy term

Tej Pratap is a 35-year-old doctor. He has been thinking of reviewing his life insurance needs ever since his son was born five years ago. In view of his increased financial responsibilities, he wants to increase his term insurance sum assured and tenor of the policy. His agent recommends a plan with maximum term, that is till 80 years of age. There are other options too with durations between 60-70 years. However, Tej Pratap wants to opt for the longest possible duration as he feels buying a policy when he is much older will be very expensive and difficult to come by. Is he right in his thinking?

Tej Pratap obviously wants to get the maximum benefit and feels the longest duration policy (till the age of 80) provides that. However, his choice should be ideally based on the purpose of life insurance, which is to provide financial support to his dependants in his absence. Would he really need to support his family at that time? Wouldn’t he have already accomplished all his financial goals by then – his child’s education, marriage and buying a house? By then, he and his wife would be living off his retirement corpus.

The duration of Tej Pratap’s term plan solely depends on when he sees himself accomplishing his major financial goals. If he can achieve that in 10 years, he requires a term plan for 10 years only. Tej Pratap must realise that with the passage of time, the family will become less financially dependent on him.Taking a longer tenor policy would mean a higher sum assured and a higher premium.

Hence, it may not be advisable to take the maximum duration available. He should rather focus on his retirement planning, since that is going to come in handy for him as well as for his wife. He must ensure that he maximises the amount that he contributes towards building the retirement corpus. This will allow him to take a considered view, as to when his dependants will cease to be his dependants. His term insurance policy should expire around that time.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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