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What should be the term or duration of your life insurance policy?

Buying a life insurance policy is important. And apart from the sum insured, there are many other things that are important too. One of them is the tenor or duration of the policy.

Buying life insurance is very important, especially for an earning individual with financial dependents. (Please read “Life after life – Why you should buy Life Insurance” for more)

And you know that buying a term insurance plan is the best way to buy life insurance. (For more, read “Term policy is the best policy”)

 

Important features of a life insurance policy

The important aspects of any life insurance policy are:

  • The sum assured
  • The term or tenure or tenor or duration of the policy
  • The premium amount

Most of focus on the sum assured and compare various policies based on that, and finally select a policy based on the premium amount. The aspect that often gets ignored is the term of the policy.

 

How most people decide the term of their life insurance policy

Most people think they need insurance till they retire – which usually means till the age of 60 years.

So, for example, if you are 35 years old, you would buy a policy for 25 years so that it remains in force till you turn 60 (that is, till you retire).

Is this approach right? Well, not really.

 

The rational behind a life insurance policy

Why do you buy life insurance? A one line answer is: So that your loved ones can keep enjoying the quality of life they are used to even after you.

Whether it is the sum assured or the tenure of the policy, this rational is something you should always keep in mind.

 

What should be the term of your policy?

So, how do you put this principle into practice?

Think about the people who are financially dependent on you currently, and decide for how many years more they would remain dependent on you. Also, think about any financial dependents you might add, and decide how many years they would remain so.

So, for example, if you are 32 years old, have an earning spouse and a son who is 5 years old, you might need insurance only for 20 years – because by the time you turn 52, your son would be 25 years old, and would be on his own.

Or, if you are 25 and don’t have a child, you might want to take that into consideration and purchase life insurance for a slightly longer duration.

 

Bottomline

There is no magic answer for the question: what should be the duration of your life insurance policy. What you need to do is carefully analyze your situation well before you commit yourself to a long term commitment.

Or, you can hire a financial planner to do the hard work for you!

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