What is the Right Term Period for Term Insurance Policy?

What is the right term period for a term insurance policy?

The word ‘right’ is often tricky here because there is really nothing that can clearly define right in this context. What may be considered the right term for one policyholder may be inadequate for another!

So, the question still remains: how to decide? In this post, we talk about some important factors to consider while deciding the duration of term insurance that we hope would help you make an informed choice.

Term Insurance Policy meaning

Let’s first quickly understand the term insurance policy meaning and its benefit to the insured. As the name suggests, a term insurance policy insures the policyholder for a specific term or duration. It is also the simplest, most basic form of life insurance plan available.

In case of an untimely unfortunate demise of the insured under the policy, their family holders/nominees are entitled to receive a monetary death benefit. This amount is usually pre-determined by the insurer at the time of policy purchase and intends to provide financial support to the family of the insured in such difficult times.

In case of the death of the insured (if he/she was the primary earning member for the family), his sudden passing away would create a financial vacuum and burden in the household. Hence, getting covered by term insurance would help fill that vacuum.

How to Choose the Right Term Period for Term Insurance Plans?

This choice often gets difficult because different insurance providers offer different term durations for this insurance policy. The general term offered by several insurers is 5-40 years or until the age of 99. One should ideally choose a policy term after taking into consideration his/her age of retirement. It then becomes relatively easier to make an informed decision.

For instance, the general age of retirement for most people is 60 years. Accordingly, you may decide for how long a period you would need term insurance based on your current age. If you are currently in the age range of 20-40 years, it would make sense to choose a term period of 40 years for your term insurance plan or opt for a policy that covers you until the age of 99.

However, if you choose to buy term insurance at the age of 50 years, you may choose a lesser term period, say between 25 and 35 years or again until the age of 99. This is because financial liabilities generally tend to reduce around this time and hence, a lower term duration would also serve sufficient purpose of providing financial protection.

Factors to Consider While Choosing the Term Period for Term Insurance Policies

To further help simplify your decision, here are some important factors to bear in mind when opting for a term insurance policy:

• Age of the insured: The current age of the prospective policyholder is important in determining the term period of the plan. This is because their age would decide the premium to be paid for the policy. Buying the plan when you’re younger (in your 20s or 30s) would give you lower premium rates than purchasing it as you get older.
• Coverage amount for the policy: It is essential that the term insurance plan you choose provides you more coverage than what you earn annually. As a thumb rule, consider buying a term insurance policy that provides financial coverage at least up to 20 times of your annual income. Financial experts suggest following this rule if you plan to buy the policy before 45 years of age. Thereafter, you may opt for a plan the coverage amount of which is approximately 15x of your annual earnings.
• Needs of your family: Since the benefit would directly go to your family members who are the beneficiaries under the plan (in case of your death), it is important to keep their essential needs in mind when buying the policy. Make sure that the plan you choose sufficiently provides for the financial needs of your family and covers their basic requirements in your absence.
• Add-on rider option: As you grow older, your financial responsibilities increase, thereby adding to your liabilities. Hence, it may be possible that the coverage provided by the policy that you purchased when you were younger may not prove sufficient anymore. This is why you get the option to add riders to your existing base plan. The add-on riders are meant to provide additional protection in line with your growing requirements over the years.
• Mode of premium payment: This is yet another point to remember when choosing a term insurance plan. Most term insurances come with a one-time lump sum payment of premium instead of monthly payment options. This may sometimes add a financial burden. Therefore, it’s important to bear this in mind while buying a term insurance policy.