Use short-term insurance to cover time-bound financial liabilities

They should be used as top-ups, not as the base cover for providing long-term protection to the family

ICICI Prudential Life Insurance recently launched a 10-year term insurance plan called ICICI Pru iProtect Smart Plus. Several other insurers also offer such plans. These policies can help cover time-bound financial responsibilities and usually come at a lower premium than longer-tenure covers. But buyers should weigh their pros and cons before buying them. 

Lower premiums 

A 10-year term insurance plan is generally cheaper. “This is because the insurer covers the risk for a shorter period,” says Shilpa Arora, co-founder and COO, Insurance Samadhan.  

Age plays a major role in determining the premium. “When buyers purchase term insurance at a younger age, the premium difference between a 10-year policy and a longer-term policy may not be very significant in absolute terms. But at a higher age, the cost of extending coverage for additional decades rises substantially,” says Sarvesh Kumar Mishra, chief third party distribution officer, Generali Central Life Insurance. 

A short-term plan works best when the buyer needs insurance for a fixed financial obligation. “Such a policy can suit those who need a cover only for a temporary financial commitment, such as a home loan or business loan,” says Arora. 

“Individuals who believe their risk liability will end in a few years may consider short-term insurance,” says Maneesh Mishra, chief product and marketing officer, Bandhan Life. 

Cover may end before liabilities 

The protection provided by a short-tenure term plan ends after a relatively short period. Risk arises if a buyer’s need for life cover has not ended by then. Financial responsibilities may last longer than expected, or new obligations may arise.  

“The policyholder may be left uninsured if responsibilities continue beyond the policy term,” says Varun Agarwal, business head of term insurance, Policybazaar.  

Buyers may be forced to buy a fresh policy at an older age. “Premiums are likely to be higher at an older age,” says Arora. 

If the buyer’s health deteriorates in the meantime, they may face difficulty getting insured. A medical condition could reduce their chances of approval. Underwriting tends to be stricter at a higher age. “There is even a possibility of an older buyer’s application being rejected due to adverse changes,” says Agarwal. 

Who should consider these plans 

A short-term plan can suit parents who want to secure their children’s education goal, or those who have taken an education loan. 

“Homeowners with a loan that will be repaid within the next few years may also consider such a policy,” says Agarwal. 

Younger people may seek short-term covers for a period they consider risky. “Such periods could include occupational hazards, for instance, being stationed at an offshore oil drilling platform for a short duration,” says Maneesh Mishra. 

People above 45 may find such plans useful because of their lower premiums (a longer-tenure policy would be much costlier for them). “These plans can also be a practical option for individuals approaching retirement who require coverage only until they achieve financial independence,” says Agarwal. 

Who should avoid them 

People whose financial needs extend beyond a short tenure should avoid such plans. The main earner of a family who needs to ensure financial protection for dependants should not rely on a short-term cover. 

“People with lifelong dependants, such as a non-working spouse, ageing parents and young children, should opt for long-term policies,” says Pradeep Funde, senior vice president, Anand Rathi Insurance Brokers. He adds that those with longer-tenure loans should also choose longer-term policies. 

Use as a top-up 

A short-term plan works well when an individual already has adequate core life insurance coverage. “The short-tenure policy can serve as an additional layer of protection against specific liabilities or goals with defined timelines,” says Sarvesh Kumar Mishra.  

“The key is to match the policy term with the period during which the family would genuinely require financial support,” says Sarvesh Kumar Mishra. 

Arora says that for the family’s long-term financial security, buyers should choose a policy that provides coverage until about 65 years. 

Postponing the purchase of long-term insurance can be risky because no one can predict future health. “If financial responsibilities are expected to continue for several decades, it is wiser to lock in protection while one is younger and healthier,” says Sarvesh Kumar Mishra. 

When should coverage end? 

The ideal time to terminate a term plan is when the buyer’s liabilities reduce to zero. “If liabilities continue beyond retirement, the policy should be extended accordingly,” says Funde. A buyer may end the cover when they have sufficient savings. “Whole-life cover may be considered if the buyer wants a term plan for legacy planning,” says Maneesh Mishra. 

Finally, buyers should decide whether they are purchasing the policy to cover a liability, protect financially dependent family members, or support legacy planning. “They should also consider their financial capacity to pay premiums for the chosen duration,” says Maneesh Mishra. 

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The writer is a Mumbai-based independent journalist