What Should Be the Policy Period in Term Insurance?
A Term Insurance Plan is known to be a pure death benefit insurance policy that would help in providing cover against the risk related to the untimely demise of the insured individual during the policy term. The sum assured payout would help in taking care of the dependents, education of children, and other essential expenses.
Term Insurance plans would act like an umbrella which would be needed by you as long as it is raining. So, it is quite necessary to select the period of your Term Insurance very wisely. However, the choice for a period of term insurance plan is quite tricky. If it is very short, it would not fulfil the purpose of term insurance whereas if the policy period is too long then your premiums would be higher.
How Much Must be the Policy Period of Term Insurance?
To get an answer to this, it is important to understand the reason for purchasing a term insurance plan.
The main reason as to why a term insurance plan is needed is to secure the financial lives of your family members until your dependents are stable financially. This would imply that your family members must be able to avail the basic requirements i.e. education, medical facilities, loan payout, etc. even when you are not with them anymore. So, the policy period must be adequate for your family members to become financially independent.
In general, insurance providers would provide coverage for an individual up to the age of 75 years, 85 years, or 99 years. This will vary from one insurance provider to another. The policy period for a term insurance plan can lie between 5 years to 40 years based on the individual's age and the choice made by him. The term or policy period of a Term Insurance Plan is also one of the major factors determining the premium of a Term plan.
Some Questions That Can Help to Find the Right Policy Period
An individual can ask himself the below-mentioned questions to get an understanding of the right tenure of the term insurance plan he is purchasing.
- At what age would be retiring from work?
- For how long would his family be dependent on him financially?
- Is his spouse working? If yes, how long would she be working?
- Do his parents depend upon him financially?
- Up to what age his children would be financially dependent on him?
Factors to be Considered While Deciding on the Term Insurance Plan Duration
a. Liabilities of the Policyholder
An essential factor that must be considered for the determination of the right period of a term insurance plan is the policyholder's liabilities. In case, the policyholder is having a home loan for 10 years then it would be wiser to avail of a term insurance plan for a period of 10 years.
b. Affordability
If you have a term insurance plan with a longer policy period then it would gradually tend to be quite expensive. So, if the premium of the term insurance plan for a longer period is putting excess strain on the policyholder's finances then the cover amount and the tenure of the term insurance plan can be adjusted so that a balance can be maintained without losing any of the benefits offered by a term insurance plan.
c. Dependents and the Commitments of the Insured Individual
An individual cannot just think about leaving his family and dependents in a pool of debts without making any arrangements for their future. In case an individual has a huge debt and is worried about his dependents then the best plan is to purchase a term insurance plan which would cover the duration of the liabilities.
d. The Period Needed for Support
The period for which the insured person's family would need financial support is the major deciding factor for the term plan's duration. In case, the age of a dependent child is 5 years and he aims to purchase a term insurance plan that would provide coverage till the period of the child's education completion. If that would take another 20 years then the term insurance plan would be for 20 years. In case, the policyholder would want to extend the cover till the marriage of his child then the policy period can be extended for some more years.
e. Age of the Policyholder
Usually, term insurance plans have a policy period of 15 years, 20 years, 25 years, or 30 years. If the insured individual is around 35 years of age then a term insurance plan of around 25 years would be appropriate. Moreover, if you are choosing a term insurance plan which would end before the retirement age then the entire purpose of purchasing term insurance would be lost.
Basically, you need to opt for a term insurance plan for the duration for which anyone would be financially dependent on you. For example, if you have children, opt for a plan till such time they would not become financially independent, i.e. 25 years or so of their age.
Conclusion
So, the policy period of term insurance plans is different for different individuals as the financial goals, commitments and liabilities are different. Hence, before finalizing the policy period of a term insurance plan an individual must understand the various financial challenges his family would face in the future.