You are young and carefree today, but as you grow older, your responsibilities will grow. That is a certainty. If you have children, you will have to provide for their education, your retirement as well as care for aging parents. That too, is a certainty.
Keeping inflation and the improbabilities of life in mind, how much will you be able to save for your family’s future if you wait till a later age to start planning for all this? Here’s where life insurance comes into play.
Age is Not Just a Number
We are familiar with the proverb, “age is just a number”. But when you look at it from the lens of life insurance, age is the most important factor that determines how expensive or affordable your policy will be. The age at which you buy a policy will determine whether you pay a high premium or a low one.
When you are young, age favors you in many ways. Good health equals lower insurance costs. A 20-year-old is much healthier than someone twice their age and therefore, pays a lower premium. Their career is on an upward trajectory, so the increasing income will make the premiums even more affordable. It is important to note that the premium stays constant all through the policy term and does not increase with age.
Consider the following example: a 20-year-old and a 40-year-old both purchase a term policy for 40 years, with a sum assured of INR 1,00,00,000. The younger person would have to pay an annual premium of only INR 5,000 for 40 years, in comparison to the older person’s amount of INR 11,200 for 20 years. This is the power of age. The 20-year-old is covered for double the term but pays only half the amount of the total premium paid. Whereas the 40-year-old is covered for half the term of the 20-year-old but pays more than double the total premium paid.
Young Are More Vulnerable
Younger individuals, especially at the start of their career, would have limited savings. However, they probably have the highest number of dependents and liabilities. These could be parents who are approaching retirement age, younger siblings who need to be educated, or even grandparents with critical ailments. There could also be debts that need to be repaid, or a major forthcoming family event, such as a wedding or arrival of a new baby. The ratio between the number of dependents vs. earning members is skewed.
The probability of a younger person having large savings to tide over any sudden financial emergency caused by their death, disability, or illness, is very low. Therefore, insurance provides the best solution to protect their family’s financial stability. This is an important reason to consider when buying risk covers. Remember that the earlier you buy, the more you benefit as the premium is lower. In the event of any unforeseen incident, insurance will protect your family’s future.
Similarly, life insurance can facilitate planning systematic savings and earmarking them for specific needs. This will help you fulfill both planned vs. unplanned expenses or important vs. impulsive expenses. What does this mean? Let us take an example of saving for your child’s education. A long-term financial policy like savings linked insurance plans (ULIPS, Par or Non-Par products) will ensure compulsory savings for the specified need and lock-in till the maturity.
Most importantly, it allows for the creation of a corpus by self or by the insurance company, in case of exigency caused by death, disability or illness. The rigidity of the insurance policy structure will also ensure that the money being saved for the child’s education is not spent impulsively on a whim or instant gratification that is regretted at a later point in time.
These features, benefits, and advantages make life insurance a compelling case and a rewarding proposition for a person in their 20s to start one immediately.
Early Bird Advantages
The advantages you stand to gain by starting early:
Your Health Quotient Makes Your Policy Affordable
As health is an important indicator of the premium payable, your premium will be lower, making the policy more affordable. If you are in good health, you may even be exempted from all the medical examinations required to make you eligible for the policy.
If a 40-year-old and a 20-year-old purchase a term policy for 40 years, with a sum assured of Rs.1,00,00, 000, the former would have to pay an annual premium of INR 22,185 compared to the younger person who would only have to pay INR 5,428.
Enjoy the Benefits of Compounding
Compounding is when both your base capital and the interest accrued on it are further reinvested to grow your wealth. ULIPs offer this benefit. The longer the tenure of your investment in ULIPs, the more magnified are the returns. Compounding can increase wealth exponentially over a period of time, which is why it makes financial sense to purchase a ULIP policy at an early age.
Here is a quick comparison. A 25-year-old and a 45-year-old buy a ULIP policy with a sum assured of INR 1 cr with policy maturing when they are 60. Both of them pay an annual premium of INR 2,50,000 for 10 years. Now if we take the returns, say at 8%, the younger person will earn a maturity benefit of INR 1,89,87,106. This is almost 4x earned by the older person, who will only gain INR 48,56,025. As the younger person’s money remained invested for a longer period of 35 years compared to only 15 years of the older one, the returns multiplied.
Ensuring Financial Certainty for Dependents
The main purpose of buying insurance is to give your family financial certainty. If something were to happen to you, they would be at financial risk as the chance of having a contingency plan is much less at a younger age. A term insurance policy taken at an early age can protect your family and ensure they continue to live comfortably without compromising their lifestyle.
Protection Against Potential Loss of Income
The pandemic has shown us that things can change overnight. Whole life insurance plans have options that can secure you for a lifetime, till the age of 99. For example, the lifetime income plan assures you of a regular income that can tide you over as a contingency plan to fund expenses, help clear debts, supplement another income, or even plan for your retirement years. It is about ensuring your future earning potential and is more affordable and feasible at 25 than at 50.
Types of Insurance That Can Cover You for Life
You must choose an insurance policy depending on your future goals and requirements. There are five main types of insurance that serve different requirements:
1. Term plan
This is the most simple and affordable type of insurance. Term insurance is a pure risk plan that is taken to protect your future earnings and your family’s financial security, in the unfortunate event of an accident, illness or death by natural causes. It is called a term plan because it covers your life for a specific term i.e., anywhere from 10 to 40 years. Post that term, the policy expires.
The premiums are fixed and must be paid for the length of the premium paying term to keep the policy valid. If the policyholder dies before the policy term ends, the sum assured is paid to the nominee as a death benefit. However, if the insured person survives the defined term, there is no payout. Some term plans even offer additional benefits that protect you from critical illnesses and accidents.
3. Whole life plan
Whole life insurance offers coverage up to 99 years of age. The difference between whole life and term plans is that whole life plans propose a guaranteed payout as they cover an individual till age 99 years (few will rarely live past this). These plans provide a death benefit, survival benefit, and maturity benefit. However, these plans are expensive, and the premium may cost almost 3X that of a term plan. The premiums can be paid regularly or for a fixed period and both options cover the insured for their complete life.
If taken earlier, the whole life plan offers significant benefits. For example, a cover of INR 1 crore with a premium paying term till the age of 60, will cost a 30-year-old an annual premium of INR 7,000 compared to INR 14,900 for a 45-year-old. The cover, however, will last till 99 years of age in both cases.
3. Unit-linked insurance plan (ULIPs)
As you grow older, your responsibilities evolve. Caring for aging parents, children’s education, and buying a house are some of these. ULIP offers customized options that can evolve to your needs and priorities, with its dual benefit of investment and insurance. Premium payments are annually or monthly, of which one part goes towards the insurance cover while the rest is invested in stocks, bonds, or a combination of both.
While ULIP can be a great wealth generator, the returns are market-linked which makes them subject to market risks. However, the flexibility they offer in switching funds and the option of partial withdrawal can help mitigate this. On the death of the insured, the life cover is paid to the beneficiaries or at the end of policy term on policyholder survival, the policy pays out the maturity amount.
4. Endowment plan
Endowment offers the double benefit of insurance and savings. It helps you save regularly over a specified period of time with a minimum guarantee of sum assured payable at maturity. Endowment is a good way to build a corpus for future needs such as children’s education or your retirement.
If the insured survives the policy term, the maturity amount is paid. In the unfortunate case of the insured’s premature death, the beneficiaries will receive the sum assured along with a bonus if applicable. This makes endowment a risk-free plan that offers a certain level of guaranteed returns.
5. Retirement plan
Think you are too young to deliberate retirement? Think about the savings on your premium and the sizable growth of your corpus, if you plan for your retirement at 30 years of age. This will give you a good 30-35 years for wealth accumulation and thanks to the compounding effect, you will get better returns.
Retirement plans offer the dual benefit of investment and insurance. Also known as pension plans, the premiums can be paid systematically at regular intervals. Whole life insurance with regular payout after a certain period is a type of retirement insurance. Immediate annuity plans are single premium plans which guarantee a regular stream of income for your retirement years.
Ask the Right Questions to Choose the Right Plan
The most common mistake people make, especially youngsters on a limited budget, is choosing a plan or coverage basis their current income. Remember, as you grow older, so will your earnings. The factors to consider when choosing your plan and coverage should include an estimation of your future needs and goals, number of current (parents, siblings) and future (spouse, children) dependents, and expected liabilities (medical care for elders, children’s education, home loan).
Here are a few questions you must ask yourself to make the right decision:
- What are your future goals: Do you plan to take an education loan to study further, or do you intend to get married and have children? Your insurance must provide for these expenses and more, to protect your family from the financial strain of any unforeseen event.
- How many dependents do you have: Aging parents with medical conditions? A spouse who may not work or may not earn a fixed income? Children in the future? These are variables that need to be accounted for. Whatever the cover you may have in mind, it would be advisable to double or triple it, keeping future inflation in mind, for your family to enjoy a comfortable lifestyle.
- What are your current or future liabilities: Do you have any existing loans or any other that you intend to take in the future? To prevent the burden of EMI repayment on outstanding loans from falling on your family, it is essential to include them in the life cover you purchase.
- What health problems must be accounted for: Apart from the death benefit extended by a term plan, some plans offer additional cover in the form of riders. Riders like disability cover, loss of employment cover, waiver of premium cover, can be added by paying a small amount of added premium. These riders add considerable value to the basic term plan purchased.
Bottom Line
As you can see, it is with good reason that insurance companies’ advice purchasing a policy as early as possible. There is enough research and data to prove the benefits that accrue when purchased at a young age. By no means should you consider it a sales pitch or a marketing gimmick, as this is in your best interests. It might seem like an added expenditure, but wouldn’t you rather be safe than sorry?
