Know the Right Policy Term for Your Life Insurance

Updated: 01-10-2019 12:58:19 PM

A life insurance policy forms an important element of your financial planning. Before buying a suitable life insurance plan, be it a term plan or a ULIP, you need to weigh various risks in life, along with analysing your financial requirements. Many factors are taken into consideration before zeroing in on a plan. One of these important factors apart from premium and sum assured or coverage amount is the policy term.

What is Policy Term?

Policy term is the period for which one is insured against the stated risks. If the policyholder dies within this time period, the insurance company promises to pay the death benefit to the beneficiary. This term must be chosen wisely after proper analysis, as the premium or the cost of the insurance depends on this factor too.

Factors Affecting Policy Term

While purchasing life insurance, there are many points that customers must consider in order to get the most suitable plan for themselves. Some of these factors include sum assured or life cover, premium, riders or additional benefits, gender, smoking habits, policy term, etc. Here are some points to be kept in mind before deciding the policy term.

1. Before deciding the policy term, evaluate your retirement age or your working years. You can consider the policy term till the time you are working, as after that you might have difficulty in paying the premium amount. So, if you start early, you can opt for a longer term length like 30-35 years.
2. In case you have loans and debts, the policy term should be till the loan tenure, so that in case of any eventuality, financial liabilities are taken care of by the death benefits received as part of the insurance. In case your loan tenure is 30 years, your term length should include these 30 years.
3. Providing for children’s education is a big responsibility for parents. Ideally, your insurance policy should not end before your children complete your education. This is so because in case of an untoward event, the insurance coverage can be used for meeting the education expenses.
4. You should also consider the financial situation of your family members or other dependents before considering the duration of your insurance policy. The insurance should not end until your loved ones are financially independent. In case you are young parents and you think your children will settle down in their 20s after which they might not need any financial help, you can opt for a shorter term length of your insurance plan. In such a situation, the money saved from premium can be used for other financial requirements or for investment.

How Policy Term Affects Premium Amount

While calculating the premium for a life insurance policy, some of the factors taken into account include coverage amount, age, gender of the applicant, smoking habits and policy term. Let’s understand how policy term affects premium calculation:

• Basically one needs a life insurance till the age all his/her dependents become financially independent
• The longer the policy term, higher the amount of premium
• For a shorter term, one would be paying lower premium

How Policy Term Affects Premium Calculation

Let us understand how different policy terms change the premium amount of a term insurance plan.

Plan Name: LIC e-Term Plan

Age of policyholder: 30 years

Particulars	Sum Assured	Policy Term	Annual Premium (excluding GST)
Scenario 1	Rs. 50 lakh	30 years	Rs. 7, 850
Scenario 2	Rs. 50 lakh	35 years	Rs. 9, 250
Scenario 3	Rs. 1 crore	30 years	Rs. 15, 700
Scenario 4	Rs. 1 crore	35 years	Rs. 18, 500

Plan Name: HDFC Click 2 Protect 3D Plus Term Plan

Age of policyholder: 30 years

Particulars	Sum Assured	Policy Term	Annual Premium (excluding GST)
Scenario 1	Rs. 50 lakh	30 years	Rs. 4, 461
Scenario 2	Rs. 50 lakh	35 years	Rs. 12, 675
Scenario 3	Rs. 1 crore	30 years	Rs. 7,660
Scenario 4	Rs. 1 crore	35 years	Rs. 20, 896

Difference between Policy Term and Premium Payment Term

There are two types of terms that are considered while choosing any life insurance plan – policy term and premium payment term. Both the terms are completely different from each other.

• Premium payment term (PPT) is the period for which one needs to pay the premium
• Policy term is the duration of the coverage
• PPT can be same as the policy term and vice-versa
• For whole life, policy term is usually 100 years but the premium payment term can be lower than that, like 20-30 years

FAQs

Q1. Can I keep my policy term and premium payment term the same?

Yes, you can, though it depends on the options given by your insurance provider. Ideally,   the policy term is the duration for which you want to be insured. And premium payment term is the period during which you pay the premiums.

Q2. Is policy term important for general insurance plans?

Policy term is considered for life insurance plans because other types of plans like health insurance or motor insurance policy is usually valid for 1-3 years after which it must be renewed.

Q3. Should I get a term insurance till the age of 70-80 years?

Logically speaking, term insurance must be taken till you have certain financial liabilities to take care of. In your case, if it is 70-80 years, you can go ahead with it. People usually take it till they are 60-65 years old, as by then their dependents might start earning and financial liabilities are dealt with.