Buying term life insurance and investing the difference has long been conventional wisdom in financial planning. You’ve probably heard of this strategy or might already be following it. The essence is to buy a term life plan, a straightforward life insurance policy available at a low cost. These policies allow consumers to get maximum coverage at a minimal cost, enabling them to invest the savings in mutual funds or other asset classes of their choice.
Some international insurers charge as much as $950 per month for similar coverage, according to various aggregators. Term life insurance has several advantages. Firstly, it is the most affordable type of life insurance, allowing people to buy policies with larger face values than they could otherwise afford.
For example, in the UAE, a 39-year-old male non-smoker could buy a term life cover of $2 million, with a critical illness rider of $250,000 for a 35-year term, for as low as $6,120 a year, according to Insurance Market quotes. In contrast, a whole life policy could cost 2.5 to four times as much.
Secondly, term life insurance is easy to buy. You simply need to determine how much coverage you need, for how long, and then shop around to find a competitive rate. Insurance portals like insurancemarket.ae and policybazaar.ae are excellent for quick online searches and purchasing insurance policies.
However, many people are not convinced by the idea of getting nothing in return at the end of the policy term, which is the case with term life policies. For those who prefer a return on their investment, there are return-of-premium term insurance plans.
These plans offer life insurance coverage for a fixed term, say 35 years, and if you survive that term, you will receive all your premiums back. This psychologically reduces the sting of paying for insurance for 30 years without using it.
Consider these plans from India-based Bajaj Allianz life insurer:
– A term life cover (eTouch) offering an insurance cover of $120,000 for a policy term of 50 years is available for an annual premium of $265.
– The Life Shield ROP, a term insurance plan with the option of receiving the premiums back at maturity, has an annual premium of $880.
“Bajaj Allianz caters specifically to the needs of non-resident Indians in the UAE. The return-of-premium term insurance plans offer a good choice to customers. We are proud to be a trusted life goals enabler for NRIs in the UAE and across the GCC region,” said Rajesh Krishnan, Chief Operations & Customer Experience Officer, Bajaj Allianz Life.
Addressing misconceptions about these policies, Derek Tharp, a US-based certified financial planner, notes in one of his blogs: “One misconception is that you are ‘just getting back money you already put in,’ which is money that has ‘lost out on years of compound interest.’ However, this is the wrong way of thinking about return-of-premium insurance. The mistake is failing to acknowledge that the bulk of your premiums are still going toward your term life insurance coverage, while only the difference in premiums between the two policies should be considered the cash flow driving the investment that provides a lump sum of all your previously paid premiums at the end of your term coverage.”
How much life insurance you need
Life insurance coverage needs depend on your goals. A simple strategy is to tally up your current debt balances, a couple of years of income, and any future large expenses. A simple calculation is: If you’re buying life insurance in your 30s, multiply your income by 30.
For example, if you’re 35 and earning $100,000 a year, your death benefit should be at least $3 million. This ensures your family has a cash flow equal to about 80% to 90% of your income, says Vikrant Mehra, a certified financial planner based in India.
If you’re buying insurance later in life, the multiple used to calculate your death benefit goes down. “In your 40s, it’s 20 times your income. In your 50s, it’s 10 times your income. In your 60s, it’s five times your income,” he adds.
Whatever your life goals are, a term life insurance policy is one of the safest ways to ensure there are no setbacks to your loved ones’ plans should something happen to you. Talk to your financial adviser and secure one today if you don’t already have one.