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The popular belief is that buying early means saving more, but is that always the case? Let’s dive into the pros and cons.
Imagine this: Meera and Sanjay, two college friends, are celebrating their first paycheck. Both are excited about their newfound financial independence. While discussing their future plans, Sanjay proudly mentions buying term life insurance, citing how early purchase means lower premiums. Meera, on the other hand, feels unsure—she’s single, has no dependents, and wonders if it’s really necessary for her to lock in a policy right now. Does she need it, or should she wait?
This scenario is common for young professionals just starting their careers. While it’s popular to believe that buying term life insurance early helps you save more, is it always the best move? Let’s explore the pros and cons to help you make an informed decision.
Why Early is Often Better
Lower Premiums
Younger individuals typically enjoy lower premiums due to their lower risk profile.
Locking in Rates
Buying early can help you lock in rates before potential health issues or lifestyle changes could increase your premiums.
Peace of Mind:
Knowing you have coverage can provide peace of mind, especially if you have financial dependents.
When It Might Not Be the Best Time
No Financial Dependents:
If you’re single and without dependents, your need for term insurance might not be urgent.
Limited Financial Resources:
If you’re struggling to make ends meet, prioritising term insurance might not be the best financial decision at the moment.
No Outstanding liabilities:
If you don’t have any outstanding liabilities such as home loans, personal loans, etc.
Accumulated Enough Corpus:
You have accumulated the value of corpus which is aligns with your financial needs
Approaches to buy Term Insurance:
When deciding to buy term insurance, there are two primary approaches that individuals can consider based on their financial objectives:
Covering Debts or Liabilities
For individuals looking to use term insurance to protect against liabilities such as loans or mortgages, the policy tenure should typically cover them until the age of 60-65. The formula to determine the tenure is:
- Policy Tenure = 65 years – Current Age
The rationale behind this approach is that most individuals stop earning a regular income by this age, and their financial obligations, including debt, tend to be aligned with their working years. The goal here is to ensure that debts are paid off if something happens during the primary income-earning period.
Creating a Financial Legacy for Loved Ones
If the objective is to leave behind a financial estate for family members, it’s advisable to choose a longer policy term—usually until the age of 75-85.
- Policy Tenure = 85 years – Current Age
This longer tenure takes into account life expectancy and focuses on securing the family’s financial future, ensuring they can maintain the same standard of living in the policyholder’s absence. It helps create a financial cushion or estate that family members can rely on for independence and long-term security.
- Key Consideration: Liability Management for Financial Freedom
Once a significant financial corpus has been built to meet your family’s future needs, including the ability to maintain their standard of living in your absence, the need for term insurance
Case Study: Rahul and Nilesh
Let’s take the example of two individuals, Rahul and Nilesh, both 28 years old but in different life stages. Rahul, recently married with retired parents, felt the need for term insurance to protect his dependents. Nilesh, on the other hand, was single and financially independent, giving him the flexibility to wait until it became a more pressing need.
Key Takeaways:
Prioritise Needs:
The decision to buy term insurance should be based on your financial needs and circumstances.
Consider Age and Health:
Younger, healthier individuals generally get better rates.
Don’t Rush:
If you’re not financially ready or don’t have dependents, it’s okay to wait.
Additional Considerations:
Coverage Needs
Evaluate your financial obligations to determine the appropriate coverage amount.
Policy Term
Consider your life expectancy and choose a policy term that aligns with your needs.
Riders
Explore additional riders like Waiver of premium on critical illness and disability benefit rider to enhance your coverage.
Conclusion:
Much like Meera and Sanjay, everyone’s situation is unique. While purchasing early can offer advantages, it’s essential to assess your personal needs and financial readiness before making a decision.
Explore our Term Insurance Scoring and Ranking Model page to Decipher the Term Insurance Plans.
