Term Plan till 100 years – boon or bane?

Amol has been an early riser since his childhood as his father ingrained his belief to Amol that an early to bed and early to rise makes a man healthy, wealthy and wise. That and his father’s daily habit of reading newspaper in the morning was the legacy Amol carried on. As soon as Amol picked up the daily newspaper he saw the ad by an Insurance company offering term insurance till 100 years of age. As Amol was yet to buy a term plan so this seemed like a great offering and that led him to start thinking about buying this term plan for the financial safety of his dependents.

Amol, a working professional, carpooled to work with Sahaj. On their way to the office, Amol told Sahaj about the ad for term insurance he saw today. Sahaj was a few-only financial planner. He explained to Amol that since Amol has plans to retire by the age of 65 years, so he actually requires cover only till that age. Because post-retirement, he will depend on his pension or similar retirement money. However, Sahaj agreed to make any conclusions only after doing the complete calculations.

After this discussion, Sahaj started comparing both the term plans, the one offered till 100 years of age versus the other offered only till 65 years. He looked at the company’s website offering the plans and downloaded the quote for both these options. The premium quoted by a firm for both options was for a 25-year-old, non-smoker, Male. The annual premium including GST for 100 years coverage was 7,250/- rupees and for 65 years coverage was 4,007/- rupees, so the difference between the premiums comes out to be 3,243/- rupees.

Later in the evening, Sahaj reverted with a spreadsheet to Amol with the assumption that if Amol was to buy term plan only till 65 years of age and rather invest the differential amount 3,243/- rupees into an investment option (example: equity mutual fund) with 14% CAGR (Compounded Annual Growth Rate). Below is a sneak-peak into Sahaj’s spreadsheet:

If one invests 3,243/- rupees into an equity mutual fund for 40 years the probable pre-tax amount would come out to be nearly 51 lac rupees in year 41. To top it all if one does not withdraw this amount and let it compound at say 6% CAGR the pre-tax amount when Amol turns 100 would turn out to be 4.5 crore rupees. That’s the power of compounding!

Sahaj looked forward to discussing same with Amol in the evening. What do you think? Does it make sense to you what Sahaj is trying to tell Amol or is he going bananas by telling Amol not to go ahead with term plan till 100 years of age? Tell us your views at: abhishek.kumar13@alumni.iimb.ac.in

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2 thoughts on “Term Plan till 100 years – boon or bane?

  1. very Nice Fact…Thanks Abhisek…I come to know your website from Our Dear Pattus Email .

  2. Siddharth Dwarkani January 8, 2019 — 6:09 pm

    Absolutely right

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