Term insurance is a must for risk management which will help individuals to cover his/her life and works as income replacement . First step in financial planning is to have an emergency fund and to have term and health insurance . In this post , we will try to understand what should be the best tenure for term insurance.
Say Mr. Manu is starting his working life @ 25 years and wants to buy term insurance however not sure what should be the best tenure for term insurance . Normally you will not get a straight answer from a concerned person unless he/she is selling policy on need basis. First of all understand that you are buying insurance as an income replacement. Normally when you are earning either through a job/business and When you have an active life, you need insurance . In the case of a job , it can be 58 or 60 years . Business, it can be a little high.
Normally when you check for best tenure for term insurance, you will get an answer as to 75 years, 85 years or whole life (i.e. 99 years) however fact is that it should cover till 60 years or it can further be extended to 65 years and not beyond.
By increasing the tenure to 85 years, I am not sure one can create heritage wealth for their nominee but definitely insurance companies will get wealthy by high insurance premium. Even if you compare insurance premiums for 65 and 99 years , you will find a huge difference.
Why is 65 years the best tenure for term insurance ?
Normally you will create a retirement corpus till the age of retirement by way of investment in PF,PPF, NPS and investment in Equity Mutual fund scheme. Creation of corpus by 60 is very important . This will help you to generate a return of 2% above inflation for another 30 years post retirement (Assuming life expectancy age 90 years). Now this corpus of say 5 crore at 60 is nothing but income replacement . It will not make sense to have term insurance beyond 65 as additional income corpus. Even your child will not depend on you by this time and they will have active income by this age.
If you are the owner of a unicorn startup and have Millions of dollars in a bank account without any obligation , you may not need term insurance at all. However if your family is dependent on you and you are also having home loan, car loan etc., you should buy term insurance at least 10 times of annual income. Say your annual income is Rs. 10 Lakhs and other loans are of Rs.10 Lakhs , you should have term insurance of Rs.1.10 cr (i.e. 10 times of Rs.10 Lakhs + Rs.10 Lakhs loan liability ).
Hope you get clarity regarding the best term insurance plan. It should be max till the age of 65 years. So if you are 30 years old, you need tenure insurance of 35 years.
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