How it makes sense to go in for life insurance at an early age as the amount of premium to be paid is lower
There are some charges besides the premium that one pays on a life insurance plan. These include commission paid to the insurance agent, administration charges towards your policy, mortality charges etc. The major argument for taking 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 with age. Whenever you buy a life insurance policy the company will levy a charge for the life cover and to cover certain other expenses.
Mortality charge is a part of a life insurance premium. This is the actual cost of insurance in a life policy. In most policies, the bulk of the premium goes towards investing in a savings fund which is returned to the policyholder when the policy matures. Mortality charge is deducted from the policy's account value.
Most companies go by a table of charges prepared by the Life Insurance Corporation (LIC) based on historical data on life expectancy. The rates are based on life expectancy in India. Private insurance companies have their own tables to calculate mortality charges.
Usually, there are three factors that are taken into consideration while determining the mortality charge - the net amount at risk under the policy, the risk classification of the policyholder, and the attained age of the policyholder. Thus, you get the benefit of a reduced mortality charge if you buy life insurance at a young age. The life expectancy of a 20-year-old will be higher than that of a 60-year-old. As such, the 20-year-old will stand to benefit in terms of lower charges while buying insurance.
Some time ago, the Insurance Regulatory and Development Authority (IRDA) had asked life insurance companies to stop levying a charge if a policy is surrendered from the fifth year, besides withdrawing the mortality charge from the overall cap on charges levied by unit-linked insurance plans (ULIPs). As a result, a policyholder will benefit if he wishes to take a higher life cover while buying ULIPs. Insurance companies stand to gain too as this would give more freedom to increase administration charges.
In future, since life expectancy of the average person has gone up, it is likely that one will have to incur a higher cost when it comes to buying whole life annuities. Those who invest in pension plans will have to use at least two-thirds of the accumulated sum to buy annuities.
In case of annuities, the investor gets a regular income for a specified period in return for a lump sum payment. The savings under a pension plan have to be invested in annuities to avoid them being taxed. One-third of a pension fund value at maturity is made available to the insured free of tax. The balance has to be used to purchase annuities from any insurer.
