InvestorQ : What is the right age to buy life insurance? Should I buy at 25 as soon as I start earning or at the age of 32 when settled?
Neelam Naik made post

What is the right age to buy life insurance? Should I buy at 25 as soon as I start earning or at the age of 32 when settled?

Priyanka N answered.
2 years ago

One of the basic rules that we are taught in investments is to start early. There is an eminent logic to it. The earlier you start investing, the earlier your investment earns returns. And, the longer you stay invested, the more your returns earn additional returns. This is popularly referred to as the power of compounding. Most of us tend to apply a similar logic with respect to insurance too. The general belief is that one needs to buy insurance at an early age so that your premiums are lower and the tenure is longer. That argument is intuitively correct. But, what you need to understand here is that even if you did not buy insurance at an early age, the doors of insurance are not closed to you and you can still buy insurance even at a later stage in your life. In fact, just as buying a life insurance cover early in your life has its advantages buying a cover later in your life also has its own advantages…

Better grasp of your insurance needs at a slightly later age

When does insurance become necessary? Obviously when you know what is going to be the extent of your responsibilities. If you buy life cover at the age of 24, the moment you start earning, it may not add much value. The first question is who needs financial protection in your absence. Obviously, once you are married, your wife needs security and later when you have children then your entire family needs the security. Obviously, you begin with a term plan as a pure risk cover for your life. Now you have a better idea of the overall costs your family will have to incur in your absence.

That means: your term cover should be large enough to cover the expenses of running the house and educating the children, even when you are not there in their midst. Such needs are better articulated when you are in your mid-30s by which time you are married and have children. So, what should be your approach at a younger age? In fact, once you start earning it is always advisable to start off with a term plan. Your term plan cover can be at least 10-times your annual income to begin with and you can later look to increase the cover progressively.

At a later age, buying insurance fits better into your financial plan

This is a slightly more complicated affair. Normally, your financial plan is ripe for preparation once your long term goals can be clearly defined. Obviously, at the age of 22 when you are most likely a bachelor, it is very hard to articulate your long term financial goals. When it comes to long term goals, you need to plan for your child’s education, child’s marriage expenses, your own retirement, buying an apartment etc.

By the time you are in your mid-30s, not only are you better settled in your career or business but you also approximately know how much you need to save for your future requirements. Buying insurance at this point of time can be more meaningful. The crux of the matter is that you need not be overly worried if you did not buy endowments at a younger age. In fact you are better off. The higher premium will be more than compensated by the premium outflows you have saved over the years. Add to that, the greater clarity of your needs today!

Insurance is available even if you are more than 40

There is a popular myth among many individuals that you are not eligible to buy insurance if you are above the age of 40. Actually, there is nothing like that! Technically, one can argue that buying a term insurance early gives you a better deal. But that cannot be the justification to buy life cover early. It is difficult to get term insurance only if you have crossed the age of 65. Of course, buying term insurance at a younger age implies lower premium, but in the overall scheme of things when you consider the higher degree of certainty, the difference is not exactly material.

So it is always better to buy your life cover after you have a degree of clarity on what and how much you need to cover for. Remember, there are enough insurance companies who will be more than happy to sell insurance to you well beyond the age of 40 also. There is also an important affordability angle to it. Competition in the life insurance business is getting tougher and premiums are on the way down. This will ensure that despite higher age, you can still good deals from insurers.

What about my medical risk as I grow older

This is a technically valid argument. In the old days, any person who crossed the age of 45 was more vulnerable to lifestyle diseases like High Blood Pressure and Diabetes. Things have changed in a variety of ways. Firstly, due to the proliferation of fast foods and improved standards of living, such lifestyle problems are striking much earlier. So, young age is hardly a guarantee of good health. Secondly, the level of health consciousness among the middle aged is quite high today. One only needs to look at the number of middle aged men and women participating in the marathons to get an idea.

Also, strides in medicine mean that you do not need to naturally have medical problems with advancing age. So if you are medically healthy and fit, you can adequate insurance coverage even at a later stage in your life. And even if there are medical issues and you make a clean breast of it, most insurance companies will give you an insurance cover with a small additional loading.

Buying endowments at a later stage makes more sense

When it comes to buying endowment plans, it is actually better that you buy it later. Firstly, endowments require a higher investment outlay compared to term plans. As you move higher in your career, you are in a better position to afford endowment covers. These are investment plus insurance products and hence have a high residual value too. Secondly, many young people earning lower levels of income do not have the capacity to absorb the entire tax benefit available. At such time it is more advisable to focus on growing money than worry about insurance. As earnings capacity increases, you can look to saving tax more effectively. That is why buying insurance at a later stage can actually help you!

The moral of the story is that if you missed out buying insurance at a young age, there is nothing to worry. You can still get a very good deal in the market. With greater clarity and more products to choose from, you may actually be better off buying insurance later.