The short answer would be, “as early as possible.” But that doesn’t mean a child should also buy a term plan. There are various conditions that define the right time for anyone to buy a term life cover. For a clear understanding, it is important that you understand ‘what is term plan after all? And what makes it important enough for such consideration?’

What is Term Plan?

Term plan or term insurance plan is a pure life insurance cover. The name term insurance (or term plan) refers to an insurance contract where an insurer agrees to compensate your nominee(s) for a specific premium cost.

Why Term Plan?

The purpose of insurance is to minimize the financial stress on the family or insured in case a specific loss occurs. For example, in case of life insurance, the insurer pays the sum assured to the family of the insured, in the event of the untimely demise of the insured. Thus, the family is saved from the financial deterioration after the death of the primary breadwinner.

The term insurance cover sustains the family’s financial stability in the worst circumstances.

How Will Term Cover Work?

Nowadays, insurers offer multiple pay-out options to make dependents life easier after the claim. Following are the most prominently offered pay-out options:

  • Lump-sum
  • Regular Income
  • Growing Regular Income
  • Lump-sum with regular income (fixed or growing)

The fourth option is quite useful if you think from your dependents’ perspective who may not want to manage a large investment. The lump-sum amount is useful in meeting the immediate financial needs, liabilities, etc. and regular income for future.

What is the Ideal Age to Buy Term Plan?

Most term plans consider 18 years of age as the minimum eligible age for availing a term cover. However, the ideal age for a term cover is defined by the income earning potential of the individual. For example, a 30 years old person who is not employed and financially dependent on another may not be eligible for a term cover, though at 20-year-old person earning Rs. 500,000 p.a. would be eligible.

Thus, whether your age is ideal for a term cover or not will depend on:

  • If you are above 18 years of age
  • Your annual income

Benefits of Buying Term Cover Early

The premium on term insurance cover is quite affordable, especially for younger buyers, since age is one of the major factors in premium estimates. Also, since the premiums will remain the same, early buyers may enjoy a very low term premium later in life.

Consider this example:

Ali and Gurpreet are of same age, 30 years. Gurpreet buys a term cover of Rs. 20 Lakh as soon as he starts earning (assume, it is now). Ali decides to wait for few years until he is able to save some money out of his income. Gurpreet pays a premium of Rs. 3500 each year and will continue paying the same until he reaches 60 (maturity age).

At the age of 37, Ali decides that finally, it is time to avail a term cover. He encounters a premium of Rs. 7500 for a Rs. 20 Lakh term cover.

In the example, Ali’s procrastination has not only cost him more for the same amount of cover, but his family was also at a grave risk for first seven years. If anything had happened to Ali in that period, they would be looking at a darker future financially.

How Much Life Cover You Need?

Since the purpose of term insurance is to meet your dependents financial needs, it is better that you choose a sum assured that is large enough for that. Usually, you can avail approximately 20 to 25 times of your annual income as maximum sum assured.

Example: Gurpreet had the annual income of Rs. 500,000 at the age of 30, thus maximum sum assured he could choose was about Rs. 20 to 25 Lakh. He can, however, increase the sum assured as his income increases or based on certain life events.

Term Insurance and Life Events

The life insurance need is not static throughout your life. It changes with your income, lifestyle, the number of dependents and other factors. After retirement, when you start earning out of your own savings from your working years, and your liabilities are over, your life insurance need could be zero.

Following life stages should make you revisit your term life cover:

  • Marriage
  • Addition of a life (Child birth)
  • Lifestyle changes/upgrades
  • Income increase/Job changes

Note: Some insurers offer life stage adjustments to the sum assured of your term cover.

Whatever your age at this moment, if you have not considered a term insurance so far, perhaps it is the right time to start.

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June 2021