What Should Be The Ideal Duration Of A Term Plan?

To ensure that our family’s financial future is secure in our absence, it is key to have a life insurance cover. There are many insurance policies to choose from but one of the most common and cost-effective options is a term insurance policy.

A term insurance policy offers the complete sum assured to the nominee in the event of the policyholders’ demise during the term the policy is active. But it is important to note that if the policyholder survives the term of the policy then they do not receive anything. As a result, having the correct duration of the policy becomes quite an important aspect of the policy and should be properly calculated and assessed before committing to a term policy.

Here are a few questions to ask yourself to get an idea of how long the term of the policy should be.

1. What is the financial reserve required to cover the current outstanding liabilities?
2. What are the financial difficulties the family can be subject to in your absence?
3.  Is the amount left after clearing all debts enough to cover the family’s immediate needs?
4. What are some large one-time expenses that could arise in the future?

Let’s take a look at a few key factors that should be considered before deciding on the duration of the term insurance plan:

• Liabilities:

Any and all liabilities should be taken into consideration and the amount of time it would take to be clear of those liabilities. If a person has a home loan for 30 years then the duration of the term insurance policy should be at least 30 years as well.

• Affordability

Term insurance that provides cover for a longer duration also tends to be more expensive. In the event the premium for the duration you require is not manageable or is putting a strain on finances, the tenure and coverage amount should be adjusted to find a balance that you are comfortable with to ensure that you do not lose the benefits of the term insurance policy.

• Length of Support

The profile of the family is a major determinant of the duration chosen for the term plan. If the age of your child is 10 and the goal is of providing cover for the child’s entire educational needs then the duration should be around 10-15 years. If the marriage should be considered as well then the plan should be extended accordingly.

• Commitments and dependents

Leaving nothing behind for our family financially can make it very difficult for them to maintain their lifestyle especially if we are the earner in the family. This is substantially more difficult if there is a pile of debt for them to fend for. As a result, it is key to take term insurance that covers the duration of the liability.

• Current Age

Term insurance policies usually come with the duration of 15, 20, 25 and 30-year plans, usually only valid up until the age of 60, after which the premiums increase quite significantly. A 35-year-old person can only avail a 25-year term plan. Additionally, it is vital to choose a term plan duration that lasts until after retirement age. If you consider somebody who is 30 years old and plans to work until they reach the age of 55 and they opt for a 15-year plan, that means that the coverage or validity of the policy will end at the age of 45, which is not ideal. Also, if they decide to opt for a new plan after that point, it would cost them a fortune as the premiums owed increases with age and will be quite high. Hence, it is wise to choose a long duration at a younger age as the premiums are relatively low and do not increase for the duration of the policy.