What Should Be the Duration of a Term Insurance Plan?
PNB MetLife 14-08-2018 03:49:22 PM
Term insurance is the simplest form of life insurance as it exclusively covers you against unexpected death due to natural or accidental reasons. These plans cover you for a fixed duration and provide financial aid to your spouse, parents and children in case you are not around. So, before you buy a term insurance policy, you need to consider two critical factors – the cover of your term plan and the duration of your term plan.
The cover of your term plan depends on your annual income financial growth, future needs like children’s college education and daily financial requirement to maintain a regular lifestyle. The duration of your term plan will depend upon your age, your retirement age, your liabilities, your financial situation and your lifestyle. All these factors are equally important. In this blog, we have covered how to determine duration of your term policy.
How long should your term plan be?
There is no ideal answer to this question, but you are the best judge. Factors to be considered will be different for different people. Therefore, the duration of your term policy should be equivalent to the number of years your nominees or family members are likely to be financially dependent on you. Before you fix the duration, answer the following questions:
- What is the amount required to pay off your outstanding liabilities? Also, add any fixed liability that you are certain you will incur in the future.
- What financial difficulty would your family face if you are not around?
- After servicing debts, how long will that money last to take care of your family’s monthly expenses and other requirements?
- What are the large one-time expenses like college fees, marriage, health surgeries etc.?
These factors should be primarily considered to evaluate the duration of your term insurance plan.
- Liabilities – Consider the duration of your existing liabilities before deciding the duration of your term insurance plan. For example, if you have a home loan which will be active for next 10 years, then the minimum duration of your term plan should be 10 years.
- Affordability – Term cover should not stretch your existing financial situation. Long term plans tend to be more expensive, so weigh your options before committing to a longer term plan – higher premiums in the shorter run or longer term coverage.
- Duration of Family Support – Term cover is planned to help your family financially even when you are not present. But, this financial help will not last forever. So, the plan is to financially support until an alternative income, which is substantial to cover your family needs, are met. For example, if your kid is 10 years old and you need to support him till his post-graduation, then the plan must be for 15-18 years, that is, at least till he turns 25 years old. If you also want to support his/her marriage, then this plan needs to be extended. Also, you need to plan your spouse support and medical needs. You should consider these factors while deciding on the term.
So, based on your expected retirement age and post retirement requirements, figure out your term plan duration.