The age of insurance: Know when to buy and till when

5 MinsOct 12, 2020

Rahul, aged 23 years, works as a software developer. He has just been confirmed in his job and his parents advise him to buy life insurance. It offers risk protection and also tax saving, they reason. Since he will have to pay premiums regularly, he will learn financial discipline, they add. But Rahul is confused. He wants to know if this is the right age to buy a life insurance policy. And till what age should he extend the coverage? He also wants to know what kind of policy he should buy. So he consulted his neighbour, a financial planner. Here is how the conversation went.

life insurance

Should I buy life insurance now?

Life insurance offers risk protection, and hence, is essential. Since you are in your early 20s and single, a term insurance plan makes the most sense for you. You can get one for Rs. 50 lakh for less than Rs. 4,000 annually. But remember that the benefits come into effect only if the insured dies. If you survive the term of the policy, then you will not get any return.

Then why should I buy a term life plan? 

That’s a good question, Rahul. Term Life Insurance is a pure-play risk cover. It offers a safety net for your parents, in case something were to happen to you. If you are looking for benefits after the policy matures, you could consider a Whole Life policy. Such a policy provides benefits like survival benefit, maturity benefit, bonus if any, staggered payments, options to borrow money from the insurance company at low-interest rates, and a lot more. If you survive the policy, you are entitled to a lump sum amount. But they are comparatively more expensive. For instance, a Rs 25-lakh whole life policy for someone your age could cost as much Rs. 21,000 annually. This may pinch your pocket, now, since you have recently started earning. Besides, 50 years down the line Rs 25 lakh that you stand to get at maturity will not amount to much, if you take into account inflation. Ideally, you need a mix of both Term Life and Whole Life plans.

Do you mean I should switch over from term insurance to whole life insurance?

Not switch over, but buy additional cover. When someone is in their 20s like you, and without vices like smoking, term plans are cheap. You get a higher risk cover by paying a small premium. This is ideal because your income is also low. But the flip side is that you cannot get a high sum assured because the coverage has to match your income.

By the time you are in your thirties, your income will increase. So you would be able to afford the higher premium. Besides, chances are that by then you may be married and also have a home or a car loan. You will need to make provision for those responsibilities and hence will need a higher sum assured.  

At that time you can either buy another term life plan, in addition to your first term plan, which would be the most cost-effective option. Or you could look at a Whole Life policy, in addition to your first term plan. This will help in your retirement planning as you will get a lump sum in hand if you survive the policy.

I generally recommend that young people start with term insurance and then add a Whole Life policy before they turn 35. Now you would ask, why 35? Well, the answer is that for a new policy, premiums tend to go up from that age onwards.

Till what age should I buy the life insurance policy? Till when should I pay premiums?

I always advise people that irrespective of term or whole insurance plans, you should extend it to as much as you can, even up to 99 years. Whole Life plans have tenures that end at 100 years of age.

Even if you are retired, a term plan bought early in life, won't cost you too much to service. But with a Whole Life Plan, you must ensure you have enough funds to continue paying the premium until the policy term ends, to get the actual benefit of the policy. But since the plan offers payouts during the policy term, you can plan your finances. And after retirement, if you need money, you can always surrender the policy. Though, my advice is that this should be your last resort. 

Great! Thanks for all the advice. Now, what should I do next?

Now, you could browse through Life Insurance plans and select one that suits you best and also know your EMIs with Axis Bank's life insurance calculator.

For your assistance, Axis Bank has tie-ups with multiple Life Insurance companies such as Max Life, Life Insurance Corporation of India and Bajaj Allianz Life.

Disclaimer: The Source, a Mumbai-based content creation, and curation firm has authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.