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Life Insurance for Young Working Professionals

If you are young and working, there is no time like now to get yourself adequately insured. There is just too much sense not to do so.

Abhishek Kumar Singh

22 Apr 2008

Young Indians are better placed today to move out of home in search of better career and job opportunities. The engineering, medical and management colleges are churning out lakhs of new professionals every year. When these young professionals fan out on their quests, the need for them to be appropriately insured becomes of utmost importance.

However, as a youthful professional, insuring your life does not seem that important. Unless you have a loan liability that needs to be repaid. Or perhaps you have parents who are dependent on you. The life insurance is the security against your not being there to take care of them financially.

Such obligations and liabilities aside, there are solid reasons for getting yourself insured at as early an age as possible. It simply makes too much economic sense,

The major argument for a life insurance policy at an early age is that you can get it at a very low premium. The premium for a traditional term plan increases appreciably with age. At age 25 you can get a term insurance cover of Rs. 10 lakh for a period of 30 years for an annual premium of about Rs. 3000. You apply for the same at age 35 and the premium increases to Rs. 4500. Also, after passing a certain age you will have to go through medical tests without which you will not get a policy. As age increases, chances of various malaises such as diabetes, hypertension, heart disease increase, which makes you lesser and lesser attractive in insurability terms.

Moral: It is always advisable to take term insurance at as early an age as possible.

Another option is to go in for a Unit Linked insurance Plan (ULIP). ULIPs are also insurance plans where you can get the benefit of both insurance as well as investments. At the time of death or at maturity you gets the sum assured or the fund value whichever is higher. The premium is broken into two parts. A part of it goes towards charges such as mortality, fund management etc. The other part of the premium goes towards investments. At a younger age the mortality charges is much lower as compared to when you are older. A greater proportion of the premium amount can go towards investment and less towards mortality charges at a younger age. This helps you to have life insurance cover as well as benefit from the power of compounding and save more. The part of premium going towards investment can also be put into various options. You can choose to put in the entire amount in equity or entire amount in debt instruments or part in equity and part in debt. This allocation completely depends on how much risk you are willing to take - at a younger age you can afford to take greater risks.

Let us take an example to understand the above. Mr. X is 25 years old and he takes an ULIP where he pays a premium of Rs. 25,000 for a period of 35 years with a sum assured of Rs. 500,000. The total amount going towards the mortality charges is Rs. 6181. When he is 60, the fund value at a growth rate of 10% per annum is Rs. 43,94,774. If he delays this decision by 10 years, his mortality charges in the same premium amount goes up to Rs. 10916. This difference of Rs. 4735 might look small. That is, until we compound this amount for the next 10 years at a growth rate of 10 % per annum... the figure becomes Rs. 12,281. Moreover, at age 60, his total fund value at a growth rate of 10% will be Rs. 18,35,312, about 40% of what he would have saved had he taken the policy 10 years ago. The point here is that the amount invested differs by only Rs. 250,000 but the difference in the final corpus is a whopping Rs. 25,59,462. The magic of compounding!

The legendary investor Warren Buffet started investing at the age of 11 and still thinks he started too late. So the earlier you start with your investments the better it is for you.