Continuing to pay for life insurance when you have retired is like gambling on your death to benefit your family. But here is how the dice rolls…
I am a salaried professional,35 years old and looking for an online term plan for Rs 1 crore. Can you suggest the best option?
This rather common query on our Facebook profile triggered off a heated debate in our company. In the first instance we wrote back pointing out a couple of specific online term costing around Rs 10,700 for a term of 25 years.
The client thanked us but then asked us whether it would be advisable to go in for a 35-year plan (thus covering him till 70 years of age instead of till 60 years as suggested by us). Now here was an answer we thought we knew.
We wrote back saying that life insurance is supposed to be taken to protect your family in the event of loss of income due to untimely death. Since he was salaried and was slated to retire by 60 years and his salary would not continue beyond 60 years it would be a waste of money to continue the insurance plan beyond 60 years unless he was planning to continue working beyond 60 years.
In effect by continuing to pay the life insurance plan when you have no earned income is almost like gambling on your death to benefit your family, we told him. The gamble would also be expensive in the first 25 years since the premium on a 35-year plan is more expensive than a 25-year plan.
That is when this well-informed consumer really jolted us out of our smugness. He wrote back saying he had no intention to work beyond 60 years and also agreeing that continuing to pay the life insurance premium after retirement is akin to gambling on his own death. But he pointed out that the cost of such a gamble was extremely low. The difference of premium between a 25-year plan and a 35-year plan was hardly Rs 350 annually which means that for the next 25 years he paid a total of Rs 9,000 extra for getting an option to continue to enjoy life insurance cover of Rs 1 crore even after he reached the retirement age. After retirement he had to pay a premium of Rs 11,000 per year to continue to enjoy life insurance (or to gamble on his death as we put it) for a 10-year period when the chances of death are much higher.
Given the low stake and high potential payout isnt this so called gamble worth taking, asked the informed consumer.
When we relooked at the numbers we could not help but agree. After all the only additional cost he was paying during the earning years was a small additional premium which gave him an option to take the gamble during the years in which he was most vulnerable to death. He also had the option of not taking the gamble by letting the policy lapse at that stage if,in his opinion,he could not afford the premium or was not likely to die during the 10 year period.
So,rather reluctantly,we had to concur with the informed consumer that he could opt for the 35-year term rather than the 25-year term. In fact,when we did the maths,we found out that the option price (additional premium payable during the earning years) ranges from a low of Rs 225 annually (for a 30 year old) to a high of Rs 19,000 annually (for a 55 year old).
This episode showed us how much we can learn from consumers who have a different way of looking at things beyond the formulas.
As far as consumers are concerned,currently it makes sense for them to buy this option to gamble on their deaths.
But what about the insurance company? In a mad rush to provide the cheapest term insurance policy,arent they seriously under pricing this option that they seem to be so willing to provide their consumers. I have not been able to get any satisfactory answers from the few insurance companies that I spoke to.
If this article ignites a debate on the desirability of the insurance company offering such an option it will be good from the point of view of healthy development of the life insurance industry,which is in the consumers interest.
Author is CEO,Apnapaisa.com. firstname.lastname@example.org