I am being advised to buy term insurance of 5 cr INR with an annual premium of 1.2 lakhs INR per year for 10 years. The policy works up to 85 years. I am a 30-year-old healthy individual. How do you evaluate what is the right price, and what is the correct insurance amount for you?
There are 3 aspects to this question:
The correct method to identify the term insurance cover required is as below:
Present Value of your financial goals + Expense replacement corpus – Your existing assets
The calculation of the above especially the Present Value of financial goals and expense replacement corpus is slightly technical and may need the help of a financial planner. Since I am a financial planner myself, this suggestion may seem to be a conflict of interest. Hence, instead you may use a thumb rule of 30 times of your annual income. Though technically not correct, this would more or less serve the purpose.
Term Insurance is needed to bridge the gap between your financial goals and your assets created towards meeting those goals. Once you create the required assets to meet your goals, you don’t need term insurance anymore. In this case, the term extends till you reach 85 years. It is difficult to believe that a 30 year old who needs a cover of 5 cr will take till his 85th year to reach his financial goals. You are buying insurance which you probably don’t need. The same cover with a term which ends at the age of 60 years will be much cheaper to buy.
In this case, you will be paying premium only for 10 years but the policy will cover you till the age of 85. As mentioned above, you may not need the insurance after say 60 years (or after the age when you create assets required to meet your financial goals). Then you have the option to not renew the policy thereafter. In this scenario, you have already paid the premium upfront. This scenario is commonly seen while buying (or selling rather) Term Insurance as a risk cover for un-repaid home loans. Always opt for regular premium while buying Term Insurance, ie, you pay the premium for the year of cover and no more. This way, you can cancel the policy anytime you don’t want it and can rest assured that you have not paid premium already to the insurer.
Sachin Shah is a 30 year old Senior Software Engineer, working at an IT services company in Bengaluru. He and his wife want to plan for their retirement and also want to save for their child's education, wedding and for buying a car.View Case Study