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Wednesday, September 22, 2021

Changing insurance needs to changing life situations

Understanding which life stage you belong to will help you and the life insurer to arrive at a fairly accurate life cover required.


July 30, 2021 7:18:00 pm
term life insuranceThe protection coverage or life cover should be directly proportionate with the life stage and the responsibilities being shouldered. It is important for individuals to assess the life cover at periodic intervals. (Representative image)

Written by Amit Palta

Since recorded history, philosophers, poets and religious scholars have tried to categorize human existence into various stages. In the west, Shakespeare categorised human life into seven stages based on behaviour and closer home; according to the Vedas, there are four ashrams of life that one is expected to lead in four stages based on one’s karma.

However, in the world of life insurance, insurers consider a different approach to assess life stages. Insurers run various statistical models, considering factors, including age, gender, income level, lifestyle, policy tenure, life cover, and family medical history to calculate the premium amount.

Understanding which life stage you belong to will help you and the life insurer to arrive at a fairly accurate life cover required.

For the 20-year-old

In your 20’s, you are fresh out of college, armed with your first job. At this stage of life, health risks are minimal, and uncertainties like death or disability seem to be remote. Enjoying every moment is of prime importance, and therefore life insurance often features at the bottom of the priority list.

However, there is a distinct advantage to opt for a term insurance plan at this stage, i.e., low premiums. Even after including add-on benefits such as critical illness and accidental death benefits, the total annual premium would cost significantly lower than what it would cost in the later stages of life.

For instance, consider Sameer, a 23-year-old software professional with a monthly paycheck of Rs 50,000. For him, a term insurance cover worth Rs 1 crore for 50 years, including critical illness cover of Rs 15 lakh and accidental death benefit of Rs 50 lakh, would cost him as little as Rs 18,000 annually. Making regular premium payments can ensure he has a life cover till he is 73.

For the 30-45-year-old

By now you are most probably married, have a child, and have aging parents. This is the stage of your life where you make big-ticket expenditures such as purchasing a house and funding higher education for children. What would happen to the family’s financial health in case of your untimely demise? It’s a thought that plagues people of this age group. Taking a term insurance plan with a sum assured of 20-30 times of your annual income can ensure the family has financial security in case of an eventuality.

Now let’s calculate assuming Sameer is now 32 years old, married, and has a 2-year-old daughter. A term insurance cover of Rs 1 crore, including critical illness and accidental death benefit of Rs 15 lakh and Rs 50 lakh respectively opted for 50 years would cost him approximately Rs 29,000 annually, significantly higher vis-à-vis if had he purchased it when he was 23.

For the 45-60-year-old

By this time your children would have left the nest, and you are probably nearing retirement. At this stage, fortifying your financial savings is of paramount importance. Your untimely demise could result in loss of financial security for your family, mainly if you haven’t squared off all debts. Therefore, it is important to match your liabilities with your life cover amount and fine-tune it accordingly.

A term insurance plan can also be used as a legacy planning tool. For instance, consider purchasing a house worth Rs 1 crore that you want to leave as a legacy for your children. Considering all expenses, including a home loan and maintenance charges, the total cost of the house would work out to Rs 2-2.5 crore over a period of 20-30 years. However, a Whole Life term insurance plan that provides coverage till 85 years, purchased at the age of 59 years, with a coverage amount of Rs 1 crore would cost approximately Rs 85,000 to Rs 90,000 annually.

The protection coverage or life cover should be directly proportionate with the life stage and the responsibilities being shouldered. It is important for individuals to assess the life cover at periodic intervals. The life cover opted by an individual should not only cover financial liabilities of the family such as a home loan but also ensure that sufficient funds are available to the family to continue with their lives and the financial savings plan.

Term insurance plans provide a large quantum of life cover for a relatively low premium; the sum assured is paid out to the nominee upon the policyholder’s demise. These plans act as an income replacement tool for your loved ones giving them the financial strength to continue with their lives and their savings plan.

The author is Chief Distribution Officer at ICICI Prudential Life Insurance Company. Views expressed are that of the author.

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