Does buying Term Life Insurance early make sense? What is the right age?
We keep getting a lot of questions from unmarried, 21-22-year-olds - asking which was the right term policy for them, so they could buy it quickly and enjoy a low premium life-long - so, we thought it was important to put this into perspective, once and for all!
Undoubtedly, term insurance is the simplest insurance product that gives you the peace of mind to know that the financial needs of your loved ones will be taken care of even when you are not around. And it is a popular notion that when you - Buy Early, you Save More - so, it is common for financial advisors to push you to buy a policy early in life.
Does it mean you have to make a dash to purchase term insurance as soon as you begin to make a living? And could it be too early? Let’s find out!
Is NOW - the right time?
Before you go scouting for the right policy, ask yourself this. Do you have financial dependents (meaning spouse, children, or elderly parents who depend upon your income)? Have you made a large financial commitment? If your answer is yes, in either case, get term insurance right away.
If you have answered ‘no’ to these questions, you can find better use for your funds, at least for now. In fact, we've written a detailed article discussing exactly who should buy, and who should skip term insurance you might find helpful.
Let us explain with the example of Animesh and Siddharth, fast friends and classmates from Pune where they both completed a master’s degree in mass communication in 2016. After college, Animesh went back to his ancestral home in Kolkata and took up a job in an advertising firm, while Siddharth came to pursue a career in cinematography in Mumbai.
Fast-forward - five years later, they are both 28. Animesh just got married and has retired parents to look after. Siddharth’s parents are financially independent and have a neat retirement fund. Further, Siddharth is clear he wants to enjoy bachelorhood for an indefinite period now! Even though both friends are the same age, circumstances are vastly different for them.
In this case, Animesh should take a term insurance plan without further delay, because he has financial dependents. Siddharth on the other hand can do without one because he is single and has no dependents.
If you are wondering why we keep emphasising that Animesh should not delay the purchase, let us elaborate.
What’s age got to do with it?
You are convinced by now that term insurance is absolutely necessary as soon as you have financial dependents, but what’s the hurry? Here’s what.
The premium on your term insurance is directly related to your age. Simply put, the lower your age, the lower your premium on a term insurance policy. As a result, the earlier you buy an insurance policy, the more you save on life-long premiums.
Let’s illustrate the age factor linkage to term insurance further:
Suppose you want to buy a policy with a cover of Rs 1 crore, till you are 65. Here’s a sample of how your premiums might look, depending on the age you choose to begin this policy.
|Policy beginning age||Estimated Premium||Total No. of years premium paid||Aggregate premium paid||NPV of aggregate premium paid|
As you can see from the table above, while you only pay a slightly lower total premium when you buy a term plan early (see column: Aggregate premium paid), you have a significant cost-advantage over time when you take inflation into consideration.(see column: Value of premiums considering 6% inflation).
So in essence - Buy early, and save more (but only after you have financial dependents).
But cost is not the only factor.
The older you grow, the risk of lifestyle diseases like diabetes, high cholesterol leading to heart ailments becomes higher. In case you get a serious medical condition or disease, insurers might demand higher premiums (as much as 50-100% higher) plus there’s also the risk of outright policy rejection. To avoid such risks, you are better off purchasing a term insurance plan, as soon as you have financial dependents, without procrastinating.
Further, your premiums might rise by as much as 5% as soon as you cross your birthday. So, if your birthday is coming up in the next few months - you might want to consider doing all your research, customising the policy and making the purchase - while you still get the lower cost.
So overall, our takeaways are -
- Don't buy a term insurance policy until you have financial dependents.
- Don't delay making a purchase once you have financial dependents.
Simple, isn't it?
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Got a question you’d like to get clarified?
You can post it on the Beshak Insurance Forum - and get answers from vetted experts, for free!
- The thumb rule of buying Term Insurance early may not be relevant to you.
- You should only buy term insurance after you have financial dependents, and not before.
- You should always ask your agent to give an NPV calculation of premiums to get the full picture.
- Once you have financial dependents, buy the policy quickly - before your next birthday if possible!
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