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Indians are underinsured due to the limited awareness about the benefits and workings of term life insurance policies. However, if your family relies on your income, it is essential to secure their financial stability in case of your absence. Term life insurance is one of the crucial products that ensure your family never lacks any financial resources.
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But, you need to understand the meaning of term insurance and how term insurance works.
Before we learn how term insurance works, let us understand what is term insurance.
Term life insurance is a type of life insurance plan that provides financial protection in the form of death benefits for a specific period in return for a fixed premium amount. The insurance company offers a guaranteed payout in case of an unforeseen death during the policy term. This amount can compensate for your income loss.
This financial product provides comprehensive coverage at affordable premiums and offers tax benefits as per the prevailing tax laws.
In simple words, This term insurance policy is the contract between you and your insurer wherein you promise to pay a fixed amount, and the company provides the benefits in case of claiming your nominee/beneficiary.
Term Plans
Here is a list of steps you need to follow to get a better understanding of how does term insurance work.
Signing the Contract: In essence, while answering what is term insurance, it is basically an agreement or contract that the insurer and the policyholder sign. With this contract, the policyholder agrees to pay the premiums in a single or regular instalment for a specified period and in exchange, the insurer agrees to financially secure the policyholder’s loved ones.
Fill out the Proposal Form: With how does term insurance work, it is important to note that before you purchase a plan, you need to fill out a proposal form. Under this, you need to provide all your basic information like name, DOB, and gender, along with annual income and educational qualifications. You may also be asked about your lifestyle habits and family’s medical history in this step.
Assess Your and Your Family’s Needs: Before purchasing the most suitable term plan, you need to assess your and your family’s needs. Here is a list of all the factors you need to consider before finding the right term insurance plan.
Adequate Life Cover: The next step is to figure out the right amount of life cover you should purchase to ensure that your family can take care of their financial obligations in the event of your absence. By a general thumb rule, the appropriate life cover should be at least 15 to 20 times your annual income at the time of policy purchase. You can also use a human life value calculator to see the life cover amount you are eligible for at any point in your life.
Suitable Policy Term: The policy term determines the duration for which you are going to be covered under the policy’s benefits. The most suitable policy term should cover you until your financial dependants are no longer dependent on you anymore. You can choose term insurance with a policy term ranging anywhere from 5 to 40 years, or purchase a whole life policy for whole life protection in case you have dependant parents or spouse.
Convenient Premium Payment: While understanding how does term insurance work, it is important to learn about the premium payment options available. Most term plans, offer the option of choosing the most suitable premium term and modes. You can choose to pay the premiums in a single lump sum, for the entire policy term with the regular premium payment option or pay the premiums for a limited duration with the limited pay option. You can also select the monthly, annual, semi-annual, or quarterly premium payment modes as per the availability under the plan.
Choose the Benefit Payout Option: You can choose the benefit payout of your term life insurance plan as per the policy details. The benefit payout can be done in a lump sum amount, monthly/regular income, and a combination of lump sum and regular income.
Select Required Riders: You should always go through the list of available riders under each plan and their list of inclusions and exclusions to see what are the relevant riders for you. The list of important term insurance riders in India is Critical Illness rider, Terminal Illness rider, Hospicare Benefit rider, Accidental Death Benefit rider, Accidental Total Permanent Disability rider, and Waiver of Premium rider.
Life Stage Benefits: Go through the policy details to see if the plan offers any life stage benefits. With the life stage benefit option, you can increase your life cover amount to fit your new needs like getting married or having children.
Application Form: To get the benefits listed under the best term insurance plan, you need to submit the application form and provide the following information:
Personal Information
Family’s medical history
Existing health conditions
Date of Birth (Age)
Annual Income
Occupation Type
Make Premium Payments: After the insurer has assessed the application form, your lifestyle, and your medical conditions, they will provide you with the updated premium rate. The insurer may increase your premiums after analyzing your smoking and substance habits, your health, and your family medical history. If you choose add-on riders, then your premiums will slightly increase. Once your premium is set you will have to make payments until the end of the premium payment term to avoid policy lapse.
Assigning the Nominee/Beneficiary: The nominee of the policy is the person who would receive the benefit amount in case of your unfortunate death during the policy term. You can select your family members, friends, siblings, or even an external party like a charity as your beneficiary of the policy.
In case of policyholder’s untimely death: Now that we have understood what is term insurance, in case the policyholder dies untimely during the policy term, the sum assured on death will be paid as the death benefit to the nominee of the policy.
On survival of the policy term: In case the policyholder outlives the policy term, the policyholder will not receive any maturity benefit for regular term insurance plans. In Term return of premium plans, the premiums paid throughout the policy tenure will be returned at the end of the policy term.
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After understanding how term insurance works, let us take a look at some of the eligibility criteria required to buy term plan in India:
| Parameters | Minimum | Maximum |
| Entry Age | 18 years | 65 years |
| Maturity Age | - | 100 years |
| Policy Term | 5 years | 100 - (entry age) years |
| Sum Assured | Rs. 20 Lacs | Rs. 20 Crores |
| Premium Payment Term | Regular Premium Pay Single Premium Pay Limited Premium Pay |
|
| Premium Payment Mode | Monthly Semi-annually Quarterly Yearly |
|
Note: You can use a term insurance calculator to estimate the applicable premium for your desired term life insurance.
There are different kinds of term life insurance plans that work differently. Before making any decision, you need to have an understanding of what is term insurance and how does term insurance works so that you can choose the best plan for yourself. Given below are the term life insurance plans:
Term Life Insurance: The regular term insurance plan in India provides pure risk protection. Thus, the plan will payout only in case of the policyholder’s death or rider eventuality. These plans have no maturity or survival benefits linked to them and on the completion of the policy term, the policy coverage terminates. Under this plan, your insurance premium stays unchanged throughout the tenure. You can choose the term limit from 10, 15, and 20 years.
Term Return of Premium Plan (TROP): Under TROP plans, once you outlive the policy tenure, the insurer will pay you the amount of all the premiums paid until then. In case of the policyholder’s death during the policy term, the death benefit will be paid and the policy will terminate.
100% Refund of Premium at No Cost term plan: These plans provide the policyholder the chance to exit their term plan at a specific stage and receive all the premiums paid until that point, at the policy cancellation.
Whole Life Insurance: The whole life insurance policy provides coverage for the policyholder’s whole life (till 99/100 years of age), during which if the policyholder suffers an unfortunate death, the plan pays out the death benefit to the nominee of the policy.
The following people can benefit from buying a term life insurance plan:
| Types of People | Reasons |
| Newly Married | In case you are newly married, you can protect your dependant spouse by buying a term life insurance with a large life cover |
| Parents with Young Kids | If you want to protect the future of your child and make sure he/she is able to achieve their dreams, you can buy a term plan with a long-term policy protection |
| Young Individuals | People who are young and are starting their careers can get term life insurance at low premiums which will remain the same for the whole policy term |
| Retirees | People who are already retired or nearing the age of retirement can secure the life of their financial dependants like kids and grandkids using a term insurance plan |
| People who want to avail of tax benefits | Taxpayers can save on their yearly taxes under 80C and 10(10D) of the Income Tax Act of 1961 |
Here is a list of all the key takeaways to help you understand how does term insurance work:
Most insurance providers in India provide special premium rates for female and non-smoker customers.
You can add term insurance riders to the base plan to enhance the plan’s coverage at nominal premiums.
Regular term plans don’t provide maturity benefits, but you can receive all the premiums paid throughout the policy tenure, at the end of the policy term with the Term Return of Premium plans.
Regular term plans provide coverage for a limited span of 5 to 40 years, but you can extend the policy coverage for whole life with the whole life insurance policy.
To purchase a term plan, you need to provide a medical exam as that will impact your term insurance premium rates.
Term insurance plans are great options for those who want to secure their loved ones at low premium rates. To make the most of the benefits of different term insurance plans, you need to understand what is term insurance and how term insurance works. These plans offer tax benefits under sections 80C, 80D, and 10(10D) with some variants of term plans providing the option to receive the paid premiums at the policy termination as well. You can compare term plans online and buy them online or offline at your convenience.
Here is how term insurance works:
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
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