Insurance Rules You Need to Know

Most people in their 40s already possess investment portfolios with a balance of debt, equity and insurance. However, it is also important to review and fine-tune the portfolio from time to time in line with current prices and inflation rates. Irrespective of all other ingredients in an investment portfolio, insurance is vital to one’s “40s” financial planning.

Why Insurance at 40?

At this stage in our life, earnings may be peaking, but lifestyle and other expenses skyrocket too. It therefore becomes a crucial point in time to secure our dependents’/family’s future by ensuring long-term financial protection for them in case something unfortunate were to happen to us. This is also an important time to start planning for retirement.

Several other factors determine the need and importance of life insurance at 40:

Debt Payments

While one’s 20s and 30s are the contributory years to debt piling through loans, credit card expenses, etc., 40s is the time to begin taking stock of finances and paying off as much debt as possible before the ‘no income’ years set in. Most loans come with high interest rates and the interest particularly on credit card outstanding is exorbitant (can be as high as 40% per annum). Under such circumstances, it is best to opt for insurance policies offering periodic returns.

Diversified Investment Portfolio

People in their 40s could be two extremes – While some take huge risks with insurance hoping to get massive returns; others play it safe and become extra conservative, looking at only a basic cover. For those who already have life insurance policies, reviewing them based on current prices and inflation rates becomes vital. For those who do not have life insurance yet, it becomes necessary to get a policy at the earliest – starting with comparing life insurance products offered by different companies and picking the one best suited to one’s specific needs. It is also advisable to opt for supplementary covers over and above the basic cover taken. 

Long-term Investments

In their younger years, people usually opt for covers that yield short-term benefits. On the contrary, 40s is a time when people need to secure their future by making long-term investments to manage the risk of death and survival both. Life insurance offers protection in both these aspects through life cover and pension plans respectively.

Retirement Planning

Financial independence is essential at every stage in life and retirement years need not be any different from earning years.

As we step into our 40s, even though there are roughly 20 employment years remaining, it is the best time to start financial planning for retirement.

Purchasing a pension plan helps secure a person’s as well as their spouse’s financial future. Pension plans ensure that the policyholder continues to receive the same income even after employment ceases. For those who already have a retirement planning, it makes sense to boost it in order to accrue a substantial amount by the time retirement actually arrives.

Schemes like the Public Provident Fund (PPF) are also a great way to save for the long-term because:

• The mandatory 15-year lock in period is an excellent way to encourage long-term savings
• The interest earned is tax free
• Section 80C of the Income Tax Act offers tax exemption on the money invested towards PPF to the tune of INR 1.5 lakhs

Premiums 

If insurance plans with flexible payouts are opted for, premiums may be affordable even if the policyholder is in his/her 40s.

At this age, people are usually relatively healthy and therefore premium rates do not increase exponentially. 

Tax Benefits 

Life insurance covers are usually tax-free and the returns remain untouched. However, even though insurance offers tax benefits, this should not be the only reason to buy it.

Insurance for the Family

A critical reason to purchase life insurance is to ensure that one’s dependents, i.e. parents, spouse and children, receive a lump sum or a regular monthly income that will guarantee their financial security, in the unfortunate event that the policyholder passes away or gets disabled (thus putting a stop to his/her income). Therefore, life insurance is not just an assured life cover for the policyholder’s family, but it is akin to an inheritance that a policyholder leaves behind for his/her family.

Types of Insurance for Those in their 40s

Based on priority, following are some essential insurance covers that people in their 40s should consider:

Protection Plans 

If income replacement is your priority, then protection plans could be ideal. These are no frills life covers that have inexpensive premiums. They also offer a sizeable sum assured, which could provide as much as seven times the policyholder’s yearly income to his/her family in the event of the policyholder’s death.

Protection plans are a great way to protect one’s family from wallowing in debts that the policyholder may have accumulated in his/her living years. These plans ascertain that the policyholder’s family receives a monthly income for a specific period of time after his/her death, and this is usually in addition to the sum assured.

Investment-cum-Saving Plans

These plans are a good choice for those who wish to pay off loans/debts, while at the same time ensure they have sufficient funds for contingencies. Some investment-cum-saving plans are ULIPs, endowment policy and money back plans – along with death benefits, such plans also provide periodic returns that serve as a financial buffer during a crisis or to finance key life events (marriage, education, etc.) 

Annuity/Pension Plans

As mentioned earlier, 40s is the perfect time to start planning for retirement – for the policyholder as well as his/her spouse

By providing life cover as well as regular monthly income (annuity) after retirement, annuity/pension plans ensure that the policyholder remains financially independent and enjoys more or less the same lifestyle as he/she did when income was regular.

How Insurance Needs of 40 year Olds Vary from 20 and 30 Year Olds? 

20s and 30s is the time when people amass debts since this is the age when loans of all kinds are required – education loans, home loans, car loans, credit card expenditure, etc. This is also the time when insurance is not a priority, because usually at this age, one does not have too many dependents due to which life insurance is not given a serious thought. Still others feel that plenty of time is left to worry about insurance.

40s is the age to take a close look at one’s finances and aim towards paying off debts. Since 40s is an in-between time between starting works, taking debts, and hitting retirement, it is the ideal time to repay all outstanding before income stops. Also, in contrast to one’s 20s and 30s when the focus is more on short-term financial goals, in the 40s, people begin working towards securing their future by making essential long-term investments such as life insurance – which offers life cover and secures one’s retirement years too.

Why Buying Insurance Early Makes Sense? 

Lower Premiums: Buying insurance early in life ensures that you one can avail of low premiums throughout your policy tenure.

Substantial Corpus: If you are looking at purchasing a hybrid insurance product to create a substantial corpus, for instance to finance your retirement, then the earlier you start, the bigger will be the corpus created, since it gives the money a longer timeframe to compound, i.e. grow.

Higher Age, More Responsibilities: Although 40s is not too late to buy insurance, the problem is that insurance companies charge higher premiums with progressing age. Also, at this age, individuals have several other important financial responsibilities like parents, spouse and children’s care and medical expenses, etc. Even assuming the absence of these responsibilities, it could be that the person has outstanding loans/mortgages. One needs to take all these factors into consideration.

Long Waiting Periods: Health needs keep exponentially increasing as we age. It is wrong to start hunting for health insurance after an ailment or disease is diagnosed, because almost all health insurance plans come with a waiting period during which the insurance company does not cover certain ailments. The waiting period is typically three years for most ailments, making it important to take insurance early.

Ideally, it is best not to require any insurance in the policy’s first year, and this is only possible when the health insurance plan is taken when one is young and healthy.

Exorbitant Insurance Prices with Progressing Age: Some people continue for decades with just a few lakhs of health insurance/mediclaim. Consequently, in their late sixties/early seventies when they realise that they actually require more, they either cannot find a company willing to cover them, or they are compelled to take an extremely expensive plan, defeating the very purpose of insurance.

In some cases, premiums are so exorbitant, that within just a few years, the entire coverage amount gets paid off in premiums alone. In other cases, the list of conditions and diseases not covered in the first few years are so many, that it creates a situation where buying health insurance at a late age makes no sense at all. In such circumstances, individuals are left with no option but to use their savings to fund their medical expenses.

You may also like to read: 3 Insurance Moves To Make Before You Turn 30

Why Complete Dependence on Employer Health Cover should be Avoided by Those in 40+ Age Group?

Employer health coverage amounts are typically not sufficient and do not help keep up with life requirements that keep changing and increasing with one’s age. Employers usually offer between INR 3 to 4 lakhs insurance coverage for employees of all age groups. While this may be a decent coverage for a 25 year-old single employee, it is of no use for an employee between 40-45 years who supports a family of 4 or 5, and has only a few active years of employment before retiring.

Yet, it is often seen that a large proportion of employees in their 40s almost entirely depend on their employers for health insurance, without realising that in case they need a new health insurance plan with higher cover later, it may be too late or too expensive to get it.      

In The End!

Irrespective of age, there will always be a solid reason for an individual to be insured. However, compared to the earlier years in life, once a person hits 40, it becomes more important than ever to ensure that he/she and his/her family are adequately insured.

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