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Opinion

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.

  • Mumbai Journo says:

    >your buying ideas are obviously good. if only you let on while buying, your readers could also make some money!!!

    πŸ™‚ πŸ™‚

    Shiv Kumar

  • Raj Gopal Vuppala says:

    >Deepak,
    My take on his insurance needs are slightly different. Assuming as of now he has no dependents and no loans.

    My first question would always be “If something unfortunate happened to you, what is the impact of not having insurance today.” He should take a term insurance cover only based on today’s impact.

    As of now if he does have any liability/impact, I think his first priority should be towards retirement planning and accumulating wealth by investing in mutual funds and other investment avenues.

  • Raj Gopal Vuppala says:

    >In the future, as and when his liabilities and impact to his life changes, I think he can take additional term plans.

  • Deepak Shenoy says:

    >Shiv: I try to make a mention when there is something strong in the stock – have done so at all my buy points in Reliance, and when I bought Balaji (and the day I sold them) etc. Same with BHEL (I bought it a few days before my call)

    Writing about a buy adds a certain responsibility; I must inform readers on every sell as well. Therefore either a) I can’t have too many stocks on my reco list otherwise I will get all muddled up. or b) I need a trading diary kind of software that will notify readers when I buy or sell.

    The b) part will be something offered by Moneyoga πŸ™‚

  • Deepak Shenoy says:

    >Raj: If he is reasonably sure he will get a family, he can plan for it right away. The earlier you plan, the cheaper it is.

    Term plans are more like “If something were to happen to you 20 years from now, would you or your family have enough money to tide over and survive?” If the answer is no, you need insurance.

    Retirement planning is different. Right now is not the best time for it because his salary is low (compared to what he will earn later), and he needs to enjoy his life. An investment in tax saving ELSS funds might be all that is needed for his long term needs. But my point is: Retirement planning and insurance assessments can happen in parallel, with insurance being a higher priority earlier in life, and retiremnet planning later.

    And one must enjoy his/her money when they are young. There’s no point waiting till you’re diabetic to taste the sweetness of life.

  • Abhijit says:

    >Thanks a lot Deepak for ur valuable suggestions. I missed to tell u that I don’t have any loans & I am not married as of now but ur assumptions were correct.

    Really it was a beautiful explanation.

    I wish to go for a Term plan with an accident rider with double sum assured for accidental death. I wud consider critical illness rider in the next term plan.

    Now only question remains is selection of an insurer.

    What criteria need to be considered while selecting an insurer apart from lowest premium?

    The premium of LIC for the same sum assured are bit on the higher side than private insurers.

    Also I came across 2 Term plans from SBI Life : Sum Assured is Rs.25 lakh.
    1. The sum assured increases by 5% every year. (Premium 7676 annual)
    2. The sum assured increases by 50% every 5 years. (Premium 9440 annual)

    The annual premium for regular term plan is Rs.5079.
    But the maximum term is 25 years for all the plans.
    What do u feel of the above plans?

    Plz provide ur suggestions.
    Thank You.

  • Deepak Shenoy says:

    >abhijit: that’s a 25 year plan only. Not recommended, since it will cover you only till you’re 49.

    That policy is great for someone between 30 and 35, and in the options the best is the 50% increase every five years option. while the premium is double the level cover, you eventually get three times the coverage (after 20 years) which is very good.

  • hari says:

    >Hi Deepak,

    I think I have an alternate proposal to this issue of insurance.Just see if its correct.Since I am also of a similar age (24) what I feel is that one can cover oneself for 50 lakhs.This can be done by buying the term policy from 5 different insurance companies of Rs.10 Lakh cover each. This will cost us a 15K per annum.The extra 10K could be invested in Nifty Bees or even a diversified Mutual fund.Once the individual has created an asset over a period of say 20 years like you have mentioned in the article with a pay rise ,foreign trip etc he can drop the term policies one by one. The extra funds can be again channelized into MF or ETF’s or directly into stocks.This done over a period of 35 years will yield an individual more that 3 crores.
    I just feel paying more than 15-20K/per annum for a term policy is not worth it.
    I am following the above step bcoz for me the insurance cost is cheap.Bharthi Axa is even less than 3000 for a cover of close to 10 Lakhs.Also I think Reliance is cheap.

    I am following the above method,the rest of my money flows into a Mediclaim,Mutual Funds,and Stocks.Have not started buying the ETF,want to start doing that too.

    If there is any flaw in my strategy please point out.Since I am very busy unable to follow the markets,and your blog once I am in chennai I hope to find some time.

    Also please give your thoughts on the recent MF launched with the objective of investing abroad like the Kotak Emerging Market fund,ABN AMRO INDO-CHINA fund etc.Will it offer any distinct advantages since we can buy foreign equity?

    Thanks
    Hari

  • Raj Gopal Vuppala says:

    >Deepak,
    I still think one should n’t opt for term insurance if there is no need for it at the time of taking it. It would be better for him invest the money he plans to contribute towards term insurance. He can invest it in mutual funds, ppf or any other savings instrument.

    But these are just my thoughts and and there no hard and fast rule that everyone will agree upon.

    -Raj

  • Deepak Shenoy says:

    >Hari: I’d say 50 lakhs is way too less as cover for the long term, but yes covering it with assets as you grow is useful. You would typically need multiple term policies but need higher cover, definitely.

    Investing abroad is good, but I would personally wait a few years to see how these funds perform before taking te plunge.

    Raj: you’re right, to each his own. My feeling is take it when it’s cheaper and you know for sure that you will need the cover.

  • Ravi says:

    >Hi Deepak,
    I religiouly read all your articles in this blog and am pretty impressed the way you express in simple terminology about personal finance. I am 31 yrs now and am planning to take a term plan but undecided as to how much sum insured I need to take. I am a non smoker, married with one 10 month old kid and also I don’t have any home loan liability as I did not take one. My currents assets in terms of mutual funds, and stocks amount to about 2 lacs. Keeping in view of all this, how much should be my sum insured ? My current monthly expenses are around Rs.25000/- and my income is Rs. 8 lacs per annum. Your advice is highly appreciated.

    Thanks in advance,
    Ravi

  • Deepak Shenoy says:

    >ravi: Thanks. Let’s see – 50 lakhs of today’s money (at least) for your family to live, and say 10 lakhs for your child. That’s 60 lakhs of today’s money for about 30 years in the future, meaning a real corpus of about 1.6 crores.

    Considering you’ll save up to then as well, take only half now. A term insurance of 80 lakhs should suffice for now, taken in three years of 30, 30 and 20 lakhs, all with double accident coverage. The outgo for your age will be about 32,000 per year after you have all the insurance in.

  • Shreepad says:

    >Deepak
    Need some advice on term products on offer from various companies…
    I need a 30 yrs odd cover but with riders for accident/ disability, and no one seems to be providing this… Only the whole life/ ulips seem to have such riders
    Any suggestions for plans that I could take?

  • Deepak Shenoy says:

    >shreepad: I think most insurers provide accident but not disability insurance on term plans. You may be able to get some kind of disability insurance from a medical insurer instead, which makes more sense, because life insurers will only cover permanent disability (loss of two eyes/two limbs) which is probably quite unlikely.

  • Ravi says:

    >Thanks Deepak for the valuable advice.

    Ravi

  • Baliga says:

    >Deepak, If I may add-in, Reliance Term policy seems to be the cheapest from what I compared among Birla, ICICI, MaxNewYork and LIC. But I took the LIC as it’s backed by the govt. of India. But they made me appear for the medical tests twice and took nearly a month to issue the policy, dispite me paying the first premium in advance.
    LIC, does not seem to have riders with their term policy. But Relaince has cheapest Accidental rider. Also check out ICICI Prudentials Critical illness policy, that seems to be the best among it’s category covering 32 major illness.

  • Ravi says:

    >Hi Deepak,
    Can you please throw some light on MetLife’s TROP (Total Return of Premium) ? As per MetLife, they will pay whole premiums + 10% of bonus on the accumulated sum as survival benefit. The policy is for only 20 yrs max. Even Reliance Special Term plan also seems to be similar to this except that the max policy tenure is 30 yrs. I am 31 yrs and wanted to take a term insurance plan of 30 lacs + 10 lacs of ADB. Would you advocate either of these policies or you suggest going for pure term insurance plans ? Thank you in advance for the valuable insights you gave in your highly commendable blog.

    Ravi.

  • Uday says:

    >Hi Deepak,

    I want to to take health Insurance policy for my parents (52 &44 years). Many of the policies, seems to have many exclusions and twisted wording. I am unable to decide which policy to take. So I feel its better to take insurance from a tried and trusted. Please advise some good policies that can trusted. Thank you.

  • ankur says:

    >Some suggestions:

    When deciding how much you need:

    1. Qualify your family’s needs based on your environment. For instance,
    a) if your spouse earns or can earn, then the family is not completely dependent on you.
    b) Will your family really need the house you are buying based on a home loan? If something happens to you early on in life, then maybe your family can move in with your parents, if they own a house. If they live in a small city, cost of living can be lower as well.
    c) How confident are you about the current and future gap between your earnings and expenditure? If you expect your savings to remain high, then it might make sense to either buy a policy that reduces cover over time, or buy a low amount of coverage.
    d) look at your existing net worth as well before deciding on the total cover you need.

    A suggestion on accident cover:

    – accident cover in India covers only partial or total disability, and the definition is pretty strict: loss of at least two limbs etc. Think about that when you look at this cover.

  • Anonymous says:

    >I am another guy in the same age category who recently took a term policy. I am also of the view like Raj Gopal that he should take more insurance cover only when he has dependents.

    The cheapest and the best term policy which I came across after an hour of comparing premiums from “Online Premium calculators” was Max New York Life’s Level Term Plan. There is an option for insurance cover till the age of 60. Without any riders, premium amount for 25 lakhs is 6500 and for 10 lakhs is ~2675.

    This fulfills everything that you are looking for in a policy and is cheap too.

    ~Dhiren

  • naveen says:

    >"Hi deepak ! Thanks for that insight regarding getting he best life insurance! It has really helped me understand a lot! πŸ™‚ Have been searching for tutorials on how to plan for insurance according to my budget and needs, especially health insurance .. This tool came in handy too! Enjoy πŸ™‚
    http://www.simpleinsurance.co.in
    "

  • Anonymous says:

    >Hi Deepak,

    I wanted to learn on MFs, SIPs and other insurance tools so started reading on to your blogs. Remarkable, I actually know so much more by just reading your stuff. Thank you.

    Further, I needed your advice on how shall I go about my investments. I am 24yr old unmarried girl with no liabilities and earn 3lacs pa. I already have Life insurance with LIC and Max New York Life. Though in future, I am really keen on putting money in various SIPs.

    Request you to kindly guide me about the investments I can make, primarily to increase my wealth and secondly for tax savings.

    Thanks & Regards

  • James Morgan - Puritan Financial Advisor says:

    >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.