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Featured Comment: Planning for term insurance early


Many commenters on this blog post excellent comments and I’ll try to feature some of them as we go along. An interesting question by Abhijit on my “How Much Insurance Do You Need?” post with the following query:

I am 24 & my annual income is 3.3 lakhs.
I want to buy a term plan but I have a few queries?
1. What risk cover shud I go for? I am thinking of 20lakh? Is it enough?

2. What is the term that I shud select? Most people suggest to go for the maximum term.

3. Shud I add riders like accident rider & critical illness rider to the base term policy?

I don’t know if you have any loans or family that is dependant on you, Abhijit but let me assume that:
a) You have no dependents currently
b) and you have no loans at the moment.

Let’s now see. Why do you need insurance? To cover your loans and for your family or dependants to be able to live nicely in case something happens to you. Currently you don’t have both, but I’m sure you will acquire both debt and family over time.

The maximum term policy you can get will last you about 35 years, when your age will be 59. Most policies are of only 30 years. So you’ll be between 54 and 59 when the term ends.

Consider this: you marry and have two children, and let us say you are now 55 years old. Your cover has vanished, but your children still need money for either their education or marriage, and your wife will need to have money to survive for the rest of her life (which could be 20 more years). And of course you need to have to pay back that housing loan you took in the middle to finance your home purchase.

Exactly how much will they need? Let’s consider today’s money. A typical education or marriage plan should keep 5-10 lakhs of today’s money. Two children = 20 lakhs. A family may need about 25,000 per month to cover standard expenses. That’s 3 lakhs a year, for which you need a corpus of about 50 lakhs (6% interest per year).

That means at age 55, you need to have 50 lakhs for a 20 year expense, and 20 lakhs for your children’s futures, which is about 75 lakhs. Add a little bit here and there for hospital costs, paying back a home loan etc. and you might end up with a higher figure, but let’s consider 75 lakhs.

Consider 5% inflation, over 20 years. That gives you a realistic figure of 2 crores. You need to have Rs. 2 crores of insurance by age 55.

But to take that now will be crazy! Because at your age, you’ll pay about Rs. 300 per lakh, which for 2 crores is about Rs. 60,000 per year (plus service tax). Considering you make about 27,500 per month, this is more than two month’s salary!

And the bigger problem is: it only covers you till age 55. In all probability you need cover longer than that, at least till age 60, perhaps even higher.

Now what I would suggest is: Instead of taking one plan now, take a 35 year plan (LIC has one) now for about Rs. 25 lakhs (Amulya Jeevan). That will cost about 7500 per year.

Then, next year (2008), take another policy for 25 lakhs for s 35 year term. Same again in 2009 and 2010. Now you have four policies, for a coverage of Rs. 1 crore that will cost you around Rs. 30,000 a year, which should be well within your budget in 2010.

By this time you will have savings as well, and perhaps a housing loan. Based on that, reassess how much insurance you will need based on future projections of your costs, and plan out a 30 year term policy when you are around age 30. Again, you can spread the next round over a couple years as well.

The good thing about this is that if for any reason you suddenly come into a lot of money (like some stock options working out, or a higher paying job or even a move abroad) all you need to do is to stop paying the money. Of course you get nothing back, but for this quantum of insurance this is the cheapest options. (for policies where you get your money back, 25 lakh cover needs around 25,000 a year).

Should you take accident cover? Some policies provide for “double” your sum assured in case of an accidental death. Given that in the first few years the chances of accidents are far more than the chance of a health related disease. So I would say take the rider and reduce the amount of insurance (instead of 25 take 20 lakhs instead).

Critical illness is a very badly worded policy in India. Please check every single term and condition, you may find that the premium you pay is simply not worth it. For instance some CI policies include cancer but not breast cancer or throat cancer, heart attacks but not with certain cases etc. Please check the conditions carefully before you take it – and consider whether it’s worth it at all.

Let me also say that it’s fantastic to see someone plan for insurance so early in life. At your age, I was doing things that were very likely to kill me, and I didn’t even think about insurance! Well done. Wish you all the best.


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