- Your term plan should only cover your working and earning years
- Many insurers now offer term covers until 85, 90 or 99 years of age
- Buying a cover that extends far beyond your working age can be quite expensive
- Premiums rise exponentially as you stretch your cover beyond 75, due to higher mortality risks
- Get term cover up to 65-75 years, and invest saved premiums if needed
When buying life insurance, most good advisors recommend that you go in for a pure term plan. A pure term plan is an insurance policy that offers life cover (with no investment component, bells or whistles – we’ll tell you why you don’t need those in a later article) for a specific ‘term’ or period of your life.
So, one of the key questions that insurers ask you when choosing a term plan is the length of coverage you seek. Would you like the plan to cover your life until you turn 60, 70 or 80? How about getting covered until the age of 99? The latter are called whole life plans.
Most folks, when offered the choice of stretching the term of their life insurance policy are quite tempted to jump at it. They think – ‘I have a good probability of hanging up my boots by the time I turn 99. So why not ensure that my family gets guaranteed pay-out from my term insurance plan? If I opt for a cover up to 60 or 70 or 80, they may end up getting nothing, because I may outlive these milestones.’
Well, opting for a very long term cover or a whole life plan is not a very smart idea because life insurers are very well aware that the probability of your dying before you hit 99 is far greater than at 60,70 or 80. They budget for this probability by sharply bumping up the premiums they charge you.
The longer your stretch your term insurance cover, the more you’ll be paying by way of annual premiums throughout the policy term. The premium increases for extra cover are not small; they can really pinch your pocket.
Costly extra cover
Here’s a real-life illustration of how much your premiums can shoot up, if you add more years to your term cover.
Take ICICI Pru I-Smart Protect, a pure online term plan from ICICI Prudential Life Insurance. If you’re a 45-year-old woman who doesn’t smoke and is looking for a Rs 1 crore term plan to cover you until the age of 65 (your working years), the annual premium (for buying the plan online) works out to Rs 20,124.
Stretch the policy term until age 75 and the premium jumps to Rs 25,976 a year, a 29% increase in your outgo. Extend the term to 85, and you’ll end up paying Rs 35,056, 75% more than what you would pay for the cover up to age 65. Tweak this into a whole life plan that covers you until the ripe old age of 99, and your premium shoots up to Rs 46,813, a whopping 230% of what you would have paid for a normal term cover upto age 65.
Clearly, premiums for life policies go up exponentially the longer you seek to stretch them beyond your working years. ICICI Prudential is certainly not alone in pegging up your premiums steeply for longer coverage. Every insurer does it; in fact some charge you even steeper premiums.
Based quotes from different insurers, PrimeInvestor found that stretching the length of your term policy upto 65 by another ten years costs you about 30% extra in annual premiums today. Extending the term by 15 years (to age 80) or 20 years (to age 85) costs you 46-47% extra in premiums.
If you go the whole hog and opt for whole life policies that cover you until the age of 99, premiums shoot up to anywhere between 2 and 8 times those charged by term plans that cover you until 65.
Find out how much life insurance cover you need using our simple 4-step calculator (based on this author’s earlier article. Check it out now!
Why the additional costs
Why do term insurance premiums show this hockey stick rise with age? The answer lies in the mortality tables that insurers use to calculate the premiums they charge on term plans. As you know, every insurance contract is essentially a play on probability. By promising to pay your beneficiaries a large lumpsum (far higher than the premiums you paid the insurer) in the event of your death, the insurer is betting on the probability that the risk he’s covering (your death) is unlikely to materialise during the policy term.
To assess the probability of individuals dying at different ages, insurers use what are called mortality tables. In India, since April 2019, insurers have been using the mortality tables compiled in 2012-14 approved by IRDA.
The above mortality table for males shows the probability of people who have completed the respective age dying within a year. This is based on a study of data from insurers between 2012 and 2014.
As you can see from the above, the risk of mortality is less than 1% for folks upto 60, less than 5% for folks upto 75, but then escalates rapidly with each milestone. Given that life insurance premiums are priced to deliver a profit to the insurer after settling claims, premiums for folks in their mid-80s, nineties or later are pegged steeply higher to account for a higher mortality risk.
No matter if you are running marathons and in the pink of health at the age of 80, the insurer will still peg your premiums high based on the general experience of high risk at your age.
The right term
All this suggests that when it comes to deciding the term of your life policy, longest isn’t the best. You need to make a trade-off between protecting your family against income loss for a sufficient length of time, while at the same time ensuring that the annual premiums don’t burn a hole in your pocket.
Based on premium comparisons, we at PrimeInvestor think that you should:
- Get a term policy to cover you upto age 65 to 75 at most, for a good balance between good coverage and reasonable premiums.
- To supplement this cover beyond age 75, invest the sums (on premium) you have saved by not opting for a longer cover and leave the resulting corpus to your dependants.
For instance, if you are a 45-year old woman who’s signing up for a term cover upto 75, you’ll be paying a premium of roughly Rs 19,000-20,000 a year for the next 30 years. Coverage upto the age 99 would have cost you roughly 3 times this sum.
This allows you to save and invest Rs 40,000 a year for the next 30 years in alternative avenues. At a modest 7% return this would lead to a corpus of about Rs 41 lakh by the time you turn 75. If you take on more risks for a 12% return, you’d have accumulated a little over Rs 1 crore. You can leave this to your dependents. If you live on until 99, think of this as a small addition to your retirement kitty!
This is second in a 5-part series that covers all you need to know about how to go about choosing a term insurance plan. Read the first part of this series here.