Do you need life cover till 100 years?

For how long do you expect to live? For how long do you expect to work? Today, people are living longer and also choosing to work beyond 60 years. In such a scenario, is it sufficient to buy term insurance, typically meant to provide income replacement in the absence of the primary breadwinner's death, till the age of 60 years or do you need life cover till 100 years? DNA Money helps you decide. Read on.

Difference in coverage

The basic difference between a regular term plan and a whole life plan is that the former gives coverage till the age of 80-85 years, while the latter gives coverage till the age of 99/100 years.

"Term plans cover pure risk and there is no saving element to them. As per market practice, they provide cover till about 60 to 80 years of age. On the other hand, whole life plans offer an avenue for both savings as well as protection,'' says Karthik Raman, Chief Marketing Officer and head – products & strategy, IDBI Federal Life Insurance.

Tenure in case of a term plan is up to 40 years or 75 years of age at entry, says Sunil Sharma, chief actuary and chief risk officer, Kotak Mahindra Life Insurance.

"Till a few years ago, whole life plans were only available on savings platform and were created with an objective of legacy planning. But recently, insurers have designed pure term plans with coverage up to 99/100 years and these also cater to the need for estate transfer,'' Sharma says.

In case of term plans, some customers think that if they pay premiums for 30-odd years and don't get any money back in case they outlive the plan, then it is money down the drain. "In whole life plans, the possibility of death happening is almost 100%. So customers can be sure that their money will come back," points out Santosh Agarwal, associate director and cluster head - life insurance, Policybazaar.com.

Higher premiums

Premiums for whole life plans are anywhere between 1.5 to four times higher than that of regular term plans. But do the benefits justify these higher premiums?

Customers need to consider two or three factors - longevity is increasing, even earning years are increasing. Second, protection is to be looked at as not just a replacement of income during years, it can also be looked at from the perspective of inheritance planning, legacy, providing for spouse if something happens during retirement years. That is a different need that can be covered by whole life plans, says Khalid Ahmad, head - products, PNB MetLife.

Since the whole life plan is sure to return the money, it is a good investment option and returns over a 40-50 year period roughly work out to 8-8.5%," says Agarwal.

Who should buy it?

Ideally, one should have an insurance cover which is at least seven to 10 times the person's annual income. In case the person is looking for a pure protection plan that acts as an income replacement option for dependents/family and/or covers liabilities, they should go for a term plan. Whereas, individuals looking for long-term protection while creating a legacy for the next generation should opt for whole life plans.

"Purchase a policy post evaluating annual income, savings, health conditions, lifestyle, financial obligations, responsibilities and future dreams and goals,'' says Anilkumar Singh, chief actuarial officer, Aditya Birla Sun Life Insurance.

According to Manik Nangia, director - marketing and chief digital officer, Max Life Insurance, whole life policies are a niche proposition and typically attract high net-worth individuals looking at creating a legacy while also protecting themselves.

Whole life plans usually give a lumpsum at the end of the premium payment term which can help with medium-term goals. Post that, there could be some minor payouts to support the lifestyle of the insured person and finally, a lumpsum paid on death.

"Whole life plans are more often preferred by middle-aged individuals or are bought by grandparents as a gift for their grandchildren,'' Raman says.

The primary objective for those in the age of 25 to 35 years is to protect their dependents against any income loss. Hence, a term plan with maturity age of 60-70 should be the first priority. Once this goal is achieved and for those who are in the age group of 45 plus, legacy creation starts to surface in the long-term goals. "In this case, one should consider buying a whole life plan which will help create wealth for future generations,'' says Anup Seth, chief retail officer, Edelweiss Tokio Life.

Some assets such as a business, real estate or farmland can't be easily divided among heirs or may require ongoing maintenance costs. In these situations, whole life plans come in handy, says Souvik Jash, appointed actuary, Aegon Life Insurance. "They can provide the flexibility to leave specific assets to one beneficiary while leaving an equivalent value in life insurance proceeds to others, provide additional money for beneficiaries to pay ongoing maintenance costs of property or a business, including taxes, insurance, operating costs or other day-to-day expenses and provide liquidity to transition a business on death of the owner,'' he says.