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Embedded Value: How need for life insurance changes at each life stage


The value and term of a life insurance policy largely depend on a person’s protection needs at different stages of life. There are several factors that contribute to determining the sum assured required by a person and all such factors drastically alter insurance needs as one grows in life.

At the beginning of a career, one doesn’t have much financial liability to hedge them with insurance protection. Hence the normal instinct is to postpone taking life insurance till one gets married or even till the responsibility grows with the arrival of a child in the family. At this stage, one feels that he must provide financial protection to the child and the spouse.

Need for a term plan
A young man at the threshold of his working life is a potential wealth creator not only for himself but also for his parents, spouse and children; and his sudden demise because of sickness or accident might cause unimaginable hardship to the surviving members of the family. A term insurance policy with riders to maximise insurance protection at a minimum cost would be the right choice at this stage of life.

The next stage is when one is creating assets by committing oneself to a few EMIs. There is nothing wrong in resorting to affordable borrowing for making life more comfortable. But such financial liabilities make the dependent family members financially vulnerable if the bread-earner succumbs to an accident or a fatal disease or even a pandemic. The term insurance policy taken earlier could be utilized for releasing the mortgages or repaying the loan.

However, to maintain the family’s living standards the family would require much bigger cash flow every month. A term insurance policy taken 10 years back would be insufficient in providing the required corpus. The average sum assured for life policies today is almost double the average sum assured ten years back.

Opt for riders
It is advisable to buy one more policy with additional sum assured and riders such as double accident benefit, critical illness benefit, family income benefit rider, waiver of premium rider, etc. One or two policies for taking care of a child’s education in the absence of father or mother is recommended at 40-45 years.

Life insurers are the only providers of long-term care when one needs support and services but cannot earn himself to provide for such facilities. Hence, during the middle of one’s career, one must review his life insurance portfolio and buy deferred annuity products for himself and his spouse.

Annuity for retirement
These products provide lifelong annuity payable monthly, quarterly, half-yearly, or annually. The annuity rates depend on the age of the annuitant and on the deferment period, the duration after which funding stops and annuity commences. Every policyholder must look at this product well on time as delayed purchase of the annuity plans means a lower annuity rate for the annuitant. Joint-life annuity plans provide lifelong financial security to the spouse, too.

Life insurance is cheaper when you are younger. But reviewing one’s portfolio from time to time is absolutely necessary. Cheaper at a younger age does not mean saying ‘no’ to life insurance at middle or old age.


Source : Financial Express

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