Could it be ‘too early’ to buy Term Insurance for you?

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Once you get your first job, you’ll start making your own money, and the question of how and when to invest your money will surely cross your mind. Usually, you’re around 21 or 22 years old at this moment - and it is possible that a family friend or financial advisor you know suggests that you invest into term insurance. The reasoning would be something like this - You’re young now, and get a low premium based on your age. And it’ll stay the same for your lifetime. So, you’ll end up saving a lot of money. Buy now, and save money!  

But is this reasoning right? Should you buy a term insurance policy just so that you get to pay low premiums? It might be a matter of saving money throughout your life - but is it worth it? Let’s find out in this article.  

Why should anyone buy term insurance, in the first place?

The answer to this is rather simple - The main purpose of buying a term insurance policy is to ensure the security of your financial dependents - that is people who depend on your earnings, for their expenses. In case you pass away during the term, the insurance claim money will help them retain their lifestyle without hassle. 

So - the first question you should ask yourself is - Do I have such people in my life? Do I actually have financial dependents?

Category 1: No one depends on your income

Since you’re young, it’s very unlikely that you have any financial dependents. Your parents might still have their jobs, while you aren’t married. So - no financial dependents. If this is the case with you - the answer is pretty straightforward - don’t buy a policy right now. 

Category 2: You have family that depends on your income

But in case you’ve already taken financial responsibility like paying rents or EMIs for the house, or contributing a significant share in the household expenses, then your death could cause significant financial disruption, and that risk should be covered by a term insurance plan. 

In fact, if you fall under the Category-2 - you should buy a policy as soon as you can. Because then, the whole concept of - buy early to freeze a lower life-long premium begins to make more sense. 

Here are some examples to give you more clarity. 

1 - Aakash has just passed out of college, and taken a job from a campus placement. He makes 20K per month and has a few EMIs to pay off for personal purchases like a new phone and a laptop. His parents both are employed in a Central government job, and would retire after 15 years with lifelong pensions. They all live in their owned house, and also have a flat that pays them a regular monthly rent. With this said - Aakash doesn’t have any financial dependents, or major responsibilities. 

So, he doesn’t need to buy term insurance at the moment. 

2 - Apeksha found a job off-campus with a large MNC and a decent pay-package. She is very happy because she can now finally settle the loans that her parents had taken many years ago to buy a house. Her dad is retiring from private service in a couple of years, and wouldn’t have a pension. Her mom is a housewife. In a few years, Apeksha would become the sole bread-winner, and her entire family would rely on her earnings for their short-term and long-term expenses. 

So, she must buy a term insurance plan, as soon as possible to protect their financial future. 

Does buying early save you money? 

The best way to understand this is to do an actual calculation of what is paid in premiums over a lifetime. Let’s take another example. 

Kunal, 25 years old, wants to buy a term insurance cover of INR 1 crore up to the age of 65 years. He’s confused whether he should buy a policy now or 5-10 years later. Let’s take a look at the premium he’ll have to pay, based on the age he starts the policy.

When you look at the aggregate premium paid during the term, there is not much difference in the premium amounts. However, when you look at the NPV (Net Present Value) of the premiums, you can see that the difference in the premium amounts is actually wide and buying a policy at an early age could save you a considerable amount of money over time. 

Summing up, it’s a very good thought that you want to save or invest from the very first pay check you receive. However, don’t get swayed by uninformed advice that everyone should buy term insurance as early as possible. 

As you saw above, only those who have financial dependents will have use of term insurance, and if you don’t - you should simply put the same amount into an investment plan that will help you grow your wealth, instead. Talk to a good financial advisor, before you make a decision about buying term insurance. 

You can also post a question you have on the Beshak Insurance Forum, and get responses from financial advisors and insurance experts. And it’s all for free!