Ch. 2: When To Buy Term Plan?

Now that you know the importance of a term insurance policy, the immediate next question you may have is when should you buy this policy? Should you buy it immediately once you start earning, and freeze premiums for the rest of your lifetime, or should you wait for a few years? When is the right time to buy a term insurance policy?

Let's find out.

Before you decide the timing of buying any insurance, you should first always revisit the purpose of buying the policy. You buy a term insurance policy to provide financial security to your dependents or ensure they are insulated from any large liability you have. So, the immediate next question hence is -

Do you have or do you have visibility of dependents in your life or do you have any loans/ liabilities?

• If yes, you need to buy term insurance as soon as you can.
• If not, feel no urgency to invest in a term insurance policy.

Here are two examples to give you more clarity.

Example 1: Jay works as an accountant at a CA firm. Both his parents are employed in government jobs and would retire after 15 years with lifelong pensions. Right now, Jay doesn’t have any financial dependents or major responsibilities.

So, he doesn’t need to buy term insurance at the moment.

Example 2: Raj works in a large company and has a decent pay package. His mom is a housewife and his dad is retired. Raj is the sole breadwinner, and both his parents depend on his earnings for their short-term and long-term expenses.

So, he must buy term insurance as soon as possible to safeguard their financial future.

Generally, the rule of thumb is - 'the earlier you buy term insurance, the lower your premiums will be’. The insurance company decides your premiums based on the age at which you buy the policy and then this premium amount remains the same throughout the duration of your policy. Hence, the traditional recommendation is you should buy the policy as soon as possible, to freeze that lower premium rate.

Let’s look at an example.

Amey wants to buy an INR 1 Crore policy up to the age of 65 years. Here's the premium he would pay, adjusted for inflation, depending on when he buys the policy.

As you can see, there is not much difference in the aggregate premium paid during the term. However, when you factor in 6% inflation and calculate the NPV of the premiums, you can see the difference is wide, and buying a policy early could save Amey a considerable amount of money over time.

Having said that, it makes no sense to buy term insurance just because it is cheaper. Before buying term insurance, you will have to factor in every short-term and long-term monetary need of your family - to understand how much cover you will have to buy, or the customizations (like adding the Married Women’s Property addendum) you will have to choose. By buying a policy too early, when you don’t need it, you’ll end up making inappropriate decisions that could cost you in other ways.

Therefore, it is meaningful to buy term insurance only when you have financial dependents, or when you have made definite plans for the future.

As you grow old, the chances of contracting a lifestyle disease, like diabetes or high cholesterol rise significantly. These changes could mean much higher premiums or even policy rejection. Keep in mind…

So, if you are going to be 35 soon, and intend to have financial dependents in the future - NOW might be the ultimate deadline to get any meaningful advantage from a term insurance policy.