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What is Term Insurance? Term Plan Meaning and Definition

Term Insurance is a pure protection plan that provides life cover to the policyholder in return for timely premium payments. Learn to understand the definition and meaning of the Term Insurance.

  • Jun 10, 2022

What is term insurance? This question is one of the most important questions posed before future planning.

Life insurance is an important financial instrument that helps individuals in managing their family’s financial security after them. Despite being such an important financial question- “What is term life insurance?” there is only a small number of people who are aware of such a plan. Term plan being the purest form of life insurance, you should invest in it right now.

But before you go ahead and understand What is term insurance, it is important that you understand insurance better and know the nitty-gritty because if you buy the wrong product, you are in for a long-term product.

In this article, we will discuss what is term life insurance and how it works. We would also take you through its benefits.

What is Term Insurance? (Term Insurance Meaning)

What is term insurance? This is a very crucial question that is asked during the first step of financial planning. Term insurance means an agreement between the policyholder and the insurance company. In case of the policyholder’s unfortunate demise, a certain amount is paid to the insured person’s family by the insurance company.

Term insurance is a pure life insurance product that provides financial aid to your family in your absence in exchange for a premium. All you need to do is to understand what term insurance is and pay an affordable premium and get a life cover.

Although you do not get any benefit from surviving the term, you will surely live a stress-free life without worrying about your family’s well-being after you.

If you are looking to buy a term insurance policy, make sure that you have done your research and chosen a plan that suits your requirements well.

Before we move ahead and learn more about its benefits, let us first understand how term insurance actually works.

Basics of Term Insurance

If you are someone who wants to understand the basics of term insurance, we’ve got you covered. Refer to the infographic below, which is sufficient to explain term insurance:

How does term insurance work?

Term insurance provides financial security to your family in case you meet with an unfortunate event. But that is not it, you have to keep in mind a few things before you enrol for a term insurance plan. Before you buy a term plan, make sure that the company is trustworthy and has a good claim settlement ratio. The claim settlement ratio shows the number of claims that are settled by an insurance company.

You, as a policyholder, pay a small premium against the sum assured to the insurance company. Sum assured is the amount you get as a life cover if something happens to you before the policy matures. Term insurance has a guaranteed death benefit and compensates your nominee for losing your income.

There are a few steps that are followed by insurance companies in general which we will discuss in detail now.

Eligibility for term insurance

  • The policyholder must be a citizen of India. NRIs can also buy insurance from insurance providers in India.
  • Usually, the insurance buyer has to undergo a medical test beforehand. This makes the insurer aware of the health conditions of the insured. This also determines the amount of premium. For instance, the premiums for smokers in a term insurance plan are usually higher than those of non-smokers.
  • The financial objectives and coverages vary with advancement in the age of the policyholder. A term insurance plan can be purchased at any point in time between the ages of 18 and 65.

Assess your family’s requirements

One of the first steps to applying for a term insurance plan is understanding your family’s requirements. You should not buy any term insurance with any life cover. You need to make sure that the life cover is enough for your family to maintain the lifestyle after you.

As a rule of thumb, you should get a life cover that is 10 times your annual salary. This way, you know that the cover is enough to handle your family’s needs in your absence. Also, check if you have any EMIs or loans and plan for a term insurance cover. You don’t want your cover to be used up, finishing the liabilities you might have left behind.

When you put all this in place, you will understand the ideal term insurance cover you can apply for.

Purchase the term insurance

Now that you have a clear understanding of your requirements, we suggest that you take the next step towards purchasing the policy. Here, you must remember that you choose the right policy and then fill out the forms correctly. You will get a proposal form that will consist of questions related to your medical and health conditions.

You need to ensure that you fill in every piece of information accurately because this information determines not only your premium but also your claim process settlement. The insurance company has the right to decline the claim for your family if they find out that the information was hidden.

Check your premium

You can check your premium online or when you apply for the term insurance plan after you have applied for one. The best way is first to check your premium through online term insurance quote calculators and then see which one is better for you. Of course, these calculators don’t give you an exact quote but help you understand the range you can expect the premium to be.

Term insurance premium depends on numerous factors like age, health conditions, annual income, amount and tenure of insurance coverage and also on information like if the policyholder is a smoker or a non-smoker.

Rider options

Term insurance is good, and it also offers good coverage if taken in time at affordable pricing. However, you can enhance the protection further with rider insurance policies. These policies help you enhance your coverage at a nominal charge. For example, accidental death coverage can be one of the rider policies you can opt for to have additional protection in case of accidental deaths. Unpredictability is the rule of nature; being ready should be your priority.

Assign a nominee

Last but not least, in fact, the most important, make sure that you assign a nominee for your policy. A nominee is someone who will receive the monetary benefits from your term plan. It should be an immediate family member who can care for your dependents.

Apply online

Online term insurance plans can be a better way to get term insurance since it not only gives you the time to go through all policy-related documents but also helps you reduce your premiums to a certain extent.

Who should buy term insurance?

Most people prefer term insurance coverage up until age after retirement, such as 65 or 70, and rule out entire life insurance. The average age of the population in India is also this. You could choose to raise this age for protection if you were married later in life and then decided to have children when you were older.

Document required for term insurance

1. Proof of identity

You must provide an official photo identity proof to the insurance company, such as your Aadhar card, PAN card, Voter ID card, passport or driving license.

2. Proof of age

The minimum age required for a term insurance plan is 18. Hence, you have to submit identity proof to ensure your age.

3. Proof of address

An official document that can be proof of your permanent residential address is required. Any document such as an Aadhar card, PAN Card, Passport, Voter ID, official bank statement, electricity, telephone, or any other government utility bill can be used for the same.

4. Income proof

Your income plays a significant role in determining the coverage and the sum assured. Besides, this helps the insurance company to decide if you can pay your premiums on time or not.

3 Important Reasons to Choose Term Insurance

Higher coverage

Because the premium on a term plan is lower as compared to traditional policies, you can afford a higher coverage for the same premium amount. For example, if you are in your 30s, a term plan with a policy duration of 30 years for a cover of ₹1,00,000,00 is easily affordable. However, the premium on a traditional plan for ₹1,00,000,00 would be very high and probably beyond your financial capabilities.

Additional riders

You may include additional riders to procure comprehensive life coverage. You may opt for a critical illness rider that pays a certain amount in case you are diagnosed with the covered diseases. This benefit is over and above the regular benefits payable to your beneficiaries in case of an untoward circumstance during the policy term.

Some of the other riders include the waiver of premiums, disability coverage, and loss of employment. You must choose the riders as per your requirements because such benefits are available at an additional premium. It is recommended that you understand more about such riders while understanding the term insurance’s meaning.

Unique features

Insurance companies are innovative and provide some very unique features with the term plans. An example is that insurers often offer a discount on the premium amount if you are a non-tobacco user. Moreover, you may not have to undergo a medical test when buying a term plan. Knowing what term insurance is and buying a policy was never easier than today.

Insurance is an important aspect of financial planning. It is an excellent way to protect your family against unfortunate events financially. Term plans are pure insurance policies that are affordable and simple. In case of an unforeseen incident during the policy term, the benefits are paid to your beneficiaries. In the case of your survival, there are no maturity benefits. Now that you understand the term plan buy one today and protect your loved ones in your absence.

Types of Term Insurance Plans

1. Level Term Insurance Plan

In the level-term plan, the premiums to be paid for the entire policy term remains fixed. The premium and the sum assured agreed upon by you, and the insurer will not change for the entire term.

2. Increasing Term Insurance Plan

In this type of term insurance plan, the death benefit or sum assured keeps increasing as the years go by. But the premium remains the same and doesn’t change. Certain policies also have a cap until the sum assured stops growing.

3. Decreasing Term Insurance Plan

In a decreasing term plan, the sum assured keeps decreasing every year till the policy term ends. The premiums of this insurance policy are comparatively lower when compared to other plans.

4. Term Insurance Return of Premium (TROP)

If you buy a return of premium policy, you will get all of the premiums paid to the insurer by the end of the policy year. But this stands true only if you survive the policy term. So, in the event of your death, the sum assured would be given to your beneficiary but if you were to survive, then only the premiums would be returned to you.

5. Convertible Term Plans

In convertible term plans, you can convert your term plan to a different life insurance policy in the future. The type of insurance policy would be of your choice, including whole life insurance, endowment plan, etc.

6. Term Plans with Riders

FAQs for term insurance policy

1. What is term life insurance?

The meaning of term insurance is an insurance policy that aims at helping policyholders secure their family’s financial security in case of any unfortunate event or eventuality.

2. Do I get tax benefits for premiums paid against term insurance life cover?

Yes, term insurance premiums can help you save taxes under Section 80C and Section 10(10D) of the Income Tax Act of 1961.

3. Do smokers pay a higher premium for the same life cover as compared to their non-smoking peers?

Yes, smokers do pay higher premiums for the same life cover as compared to their non-smoking peers. In most cases, this is because smoking as a habit can cause many cascading health problems. The risk is also bigger than non-smoking people for the insurance companies to cover smokers.

4. Can you calculate term insurance premiums online?

Yes, you can absolutely do that to understand how much premium you might have to pay for a specific sum assured. Use online term insurance calculators to get the approx. Quote for the premium you might have to pay.

5. Should you opt for rider policies along with term insurance?

Yes, ideally, you should. Most people feel that a term insurance plan is enough. But if you need to be added or enhanced protection, riders can play an important role. Many rider policies also help you cover the issues that your base policy sometimes does not cover. Plus, it comes at a nominal premium.

6. What is the ideal age to buy term insurance?

The 20s are considered a good time to purchase insurance and plan for your family’s future. As most people start earning in these years, the expenses are comparatively lower.

7. Is term insurance good enough for terminal illness benefits?

Yes, you can opt for terminal illness benefits. Policyholders can avail of 25% of the sum assured for their treatment. It not only takes care of your treatment but also replaces your income, as many people have to discontinue work after the diagnosis of the illness.

8. What is a term insurance rider?

Adding term insurance riders to a term insurance plan allows the policyholder to receive additional coverage. The benefits of a Term insurance rider are as follows:

  • Better protection
  • Enhanced Cover
  • Premium Waiver

9. What is a term life insurance premium?

The money paid by an individual or company for an insurance policy is known as the insurance premium. Insurance premiums are paid for life, vehicle, home, and health insurance coverage.

10. What are the factors that affect the term insurance premium?

Some of the key elements that influence the term insurance premium increase include the following:

  • Age
  • Health Situation
  • Gender
  • Smoking Patterns
  • Occupation
  • Lifestyle Practices
  • Selected Sum Assured
  • Premium Amount Term

Term insurance is an affordable form of insurance that takes care of your family in your absence. You can avail of benefits like a high sum assured at an affordable premium and financial security for your family in case of any mishap. The biggest reason why term insurance is important is that it not only acts as a source of lost income but also helps your family to pay debts and living expenses.

Kotak e-Term Plan

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  • Nominal Cost
  • Multiple Plan Options
  • Flexible Payout Options
  • Critical Illness Rider
  • Tax Savings
  • Long term Coverage

Ref. No. KLI/22-23/E-BB/492


- A Consumer Education Initiative series by Kotak Life

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