65, 85 or 99? Till what age should you buy Term Life Insurance?
You only need a term insurance cover, until you achieve financial freedom.
The classic advice is simple. You start term insurance when you start getting financial responsibilities and end it when you are free from all of them - when you are financially free.
Being financially free means that you have fulfilled all your monetary responsibilities (children’s education, weddings), created a sufficient corpus that can support your family with a passive income life-long.
Typically, the rule of thumb is to take a policy till the age of 65 years - here the underlying assumption is that financial freedom overlaps with your retirement age. But like all rules of thumb, this may or may not be true - You can achieve financial freedom before your retirement age, or due to some circumstances you may have to actively toil beyond your retirement age - to pay your living expenses or service your loans.
Based on your current income, savings, and your future expenses - you need to estimate the age by which you would have paid up for all your financial commitments and have wealth, passive income enough to take care of the remaining part of your life. This age is the age (maybe with an additional buffer of 5 years) till which you should have a term insurance cover.
Sure shot payback strategy:
There is, however, another school of thought. Long-term and ultra long-term policies are being promoted as a way to leave a financial legacy for your family. These term insurance policies offer coverage up to 85 or even 99 years, and since the life expectancy is usually much lower than that - provide a sure-shot way of getting payback to your family.
Say, someone takes a policy for a term until they’re 99 years old, and they pass away even at the ripe age of 85 - they still leave a financial legacy for their family to enjoy after they’re gone - if not legacy, the logic here could be that at least the premium paid won't be wasted - would be returned back to the nominees.
Are they for everyone?
The ideal way to know whether this will work for you or not is to look at the rate of return you will earn from such an investment at various probable age of death. This will give you a ballpark estimate of the range of returns your investment can extract.
As you would expect, ultra long-term policies have slightly different terms and costs compared to traditional term insurance plans. Let’s take an example to explain this further.
Say you take a term insurance policy starting at the age of 30, for a term until you’re 99 years old. Now, you can either choose to pay the premiums in a regular pay model for the entire duration, or a limited pay model for a part of the term. We have calculated the costs you would incur and the returns of this investment.
Let's read this: So, if you take a policy with a cover-up to age 99 and die at the age of 65 - the investment would bear a tax-free interest rate as high as 10.3%. On the other hand, even if you live up to the age of 99, and die just before the cover ends, the premiums still fetch an annual tax-free interest of 3.9%. So you are likely to make a return of 3.9% to 10.3% - depending on how early you die.
So, here’s what we say!
If you want to leave a financial legacy for your family that makes around annual 4% tax-free interest, for a term that is as long as 50 years - then, taking such a policy is a good investment strategy. If you can find better investment avenues, it may not sound too exciting. In that case, you should just take a pass.
Of course, there is the catch that - if you manage to survive until 99 years, you won’t get any payback on the premiums. But, we are sure you won’t complain about hitting a century!
Similar to ultra long-term policies, there are many lesser-known concepts and ideas that will help you make a suitable term insurance decision that is tailored to your preferences and your family’s needs. Be sure to download this free resource - The Ridiculously Simple Guide to Term Insurance, and make every term insurance decision with absolute clarity and confidence.
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