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What is Term Insurance?

Term insurance is a type of life insurance that provides coverage for a specific period and offers a death benefit to beneficiaries if the insured person passes away during the term.

  • 7,329 Views | Updated on: Jun 27, 2024

Key Takeaways

  • Term insurance gives coverage to the policyholder for a specific period of time.
  • The beneficiaries receive a death benefit if the policyholder passes away during the policy term.
  • Some popular types of term insurance include level term plans, increasing term plans, decreasing term plans, return of premium plans, and convertible term plans.
  • Term insurance can also be used to pay off debts or invest in the future.
  • When buying term insurance, it is important to consider the coverage amount, policy term, premium rates, and insurer’s reputation.

The main objective of any insurance is to secure life and provide financial stability to the family. Term life insurance offers life coverage to the policyholder for a set period instead of regular payouts.

Life insurance is a significant tool for safeguarding the well-being of your family members in your absence. Do not let them experience financial hardship in your absence; instead, protect their future by investing in a term plan. Your family can live comfortably after you with the money you leave them via a term insurance plan.

Term Insurance Definition

Term insurance is a safety tool that offers a fixed amount to the policyholder’s beneficiaries in case of the policyholder’s demise. It is like financial aid to your family in your absence in exchange for the premiums you have paid.

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 in your absence. While getting a term insurance policy, ensure you have researched and chosen a plan that suits your requirements well.

How Does Term Insurance Work?

Now that you know what a term insurance plan is, it is time to understand how it works. The way term insurance works is relatively straightforward. You purchase a policy and pay a regular premium for the policy term. Your beneficiaries will receive a death benefit payout if you pass away during the policy period.

The death benefit, determined by the policy you purchase, can range from a few thousand rupees to lakhs of rupees.

Term insurance policies are typically designed to be affordable. Because the policy is temporary and provides coverage only for a limited period, the premiums are often lower than those of permanent life insurance policies.

This makes term plans attractive for people who want to provide financial protection for their loved ones but have limited financial resources.

Types of Term Insurance Plans

Different types of term insurance plans are available in the market to suit the diverse needs of individuals. Each type has its features, term insurance benefits, and limitations. Let us have a look at the different types of term insurance plans.

Level Term Insurance Plan

The premiums remain fixed for the entire policy term in the level-term plan. The premium and the sum assured agreed upon by you and the insurer will not change.

Increasing Term Insurance Plan

In this type of term plan, the death benefit or sum assured increases as the years go by, but the premium remains unchanged and does not change. Specific policies also have a cap until the sum assured stops growing.

Decreasing Term Insurance Plan

In a decreasing-term plan, the sum assured decreases yearly until the policy term ends. These insurance policies have comparatively lower premiums than other plans.

Term Insurance Return of Premium (TROP)

When you buy a return premium policy, you will receive all of the premiums paid to the insurer by the end of the policy year. In the event of your demise, the sum assured will be given to your beneficiary, and if you survive, the premiums will be returned to you.

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 you want to convert to, would be is your choice. It includes whole life insurance, endowment plans, etc.

Why Do You Need Term Insurance?

Term insurance is relatively inexpensive and offers higher coverage amounts, making it an ideal choice for individuals who want to ensure that their family’s financial needs are met in case of an untimely demise. Here are some important reasons why you should consider buying term insurance.

Financial Security for Your Loved Ones

The most important reason to get term insurance is to ensure that your loved ones are financially secure in the event of your unexpected death. The death benefit paid out by a term insurance policy, in the event of the insured person’s demise, can help the family to cover some of the expenses of losing a loved one, such as funeral costs, outstanding debts, and living expenses.

Relief from Debts

If you have significant debts such as a mortgage, car loan, or student loan, term insurance can provide the necessary funds to pay off these debts if something happens to you. By doing so, you can ensure that your loved ones are not burdened with these debts.

Affordable Premiums

Term insurance is the most affordable type of life insurance. You can choose the policy’s length, the coverage amount, and the premium that fits your budget. You can also opt for a level-term policy where the premiums remain the same throughout the policy term.

Features of Term Insurance

Term insurance is one of the most popular and cost-effective types of life insurance. It provides financial protection to the policyholder’s family during their untimely death. Here are some of the features of term plans.

Flexible Coverage

Term insurance policies offer great flexibility in terms of coverage amount and duration. You can choose the coverage amount that best meets your needs and budget, and you can also select the policy course of your choice.

Renewable and Convertible

Most term insurance policies are renewable and convertible. It means that you can renew your policy for an additional term at the end of the policy’s term without having to undergo a medical examination.

You can also convert your term policy into a permanent life insurance policy, such as whole life insurance, without undergoing a medical examination. It is beneficial for those who may have developed health issues over time that would make it difficult to obtain a new policy.

Death Benefit

The death benefit is the money paid to the beneficiary during the policyholder’s demise. The death benefit for term insurance policies is typically tax-free and can be used for any purpose. The beneficiary can use the money to pay off debts, cover living expenses, or invest in the future.

Additional Riders

Apart from the policy benefits, these are the additional benefits that can be availed. If you want a custom policy with precise event coverage, insurance riders are also very helpful in creating one. The best insurance policy can be made by selecting the preferred riders. Insurance riders allow you to save money by avoiding the need to buy an additional policy to cover their specific needs. Additionally, it enables insurers to add additional coverage in the future.

Things to Know Before Buying Term Insurance

Buying term insurance is an important financial decision that can provide financial security to your family. But before purchasing term insurance, here are some key things you should keep in mind:

Coverage Amount or Sum Assured

Calculate the coverage your family would need to retain their standard of living and meet financial responsibilities if you were no longer there. You should consider outstanding loans, education expenses, daily expenses, and future financial goals.

Term Length

Select a term length that aligns with your financial responsibilities and goals. Consider factors such as the age of your dependents and when significant financial obligations (e.g., mortgage, children’s education) will end.

Premium Amount

Different insurance companies offer term insurance with varying premium rates. Compare quotes from various insurers to get the best deal. Online insurance calculators can be helpful for this purpose.

Insurer’s Reputation

Research the reputation of the insurance company you plan to buy from. Look for customer reviews, claim settlement ratios, and financial stability ratings from government agencies like Credit Rating Information Services of India Limited (CRISIL).

Premium Payment Options

Term insurance premiums can be paid annually, semi-annually, quarterly, or monthly. Select a payment frequency that aligns with your budget and cash flow.

Exclusions and Waiting Periods

Review the policy document carefully to understand any exclusions (conditions not covered) and waiting periods (time before certain benefits are payable).

Coverage Review

As your life circumstances change, periodically review your term insurance coverage to ensure it meets your needs. You may need to increase coverage if you have more dependents or financial responsibilities.

What are the Steps to Buy a Term Insurance Plan Online

Buying a term insurance plan online is convenient and straightforward, but it is important to follow certain steps to make an informed decision. Here are the comprehensive steps to buy a term insurance plan online:

Assess Financial Needs Before Investing in Term Insurance

Before purchasing a term insurance plan, you must evaluate your financial needs thoroughly. This involves understanding your family’s future financial requirements, such as education expenses, mortgage payments, and other liabilities. Consider your current income, lifestyle, debts, and the number of dependents. A clear assessment will help determine the appropriate sum, ensuring your family is financially protected.

Estimate the Premium for a Term Insurance Policy Before Investing

Once you have a clear idea of the coverage amount required, the next step is to estimate the premium. Use online term insurance calculators available on various insurance websites to get an estimate. These calculators require basic information such as age, gender, smoking habits, and desired sum assured. By comparing different premium quotes, you can find a policy that offers the best coverage at an affordable rate. Remember, the premium varies based on the policy term, sum assured, and health condition.

Check the Insurer’s Term Insurance Claim Settlement Ratio (CSR)

An insurance company’s claim settlement ratio (CSR) is a critical factor to consider. It indicates the percentage of claims settled by the insurer out of the total claims received in a year. A higher CSR reflects the reliability and trustworthiness of the insurer. You can find this information on the insurer’s website or through regulatory bodies like the Insurance Regulatory and Development Authority of India (IRDAI). Choosing an insurer with a high CSR ensures that your claim is more likely to be honored, providing peace of mind to your beneficiaries.

Select Additional Coverage Riders Available

Term insurance plans often come with optional riders that provide additional benefits. Common riders include critical illness cover, accidental death benefit, waiver of premium, and disability income benefit. These riders enhance the base policy by offering extra protection against specific risks. Assess your needs and consider adding these riders to your policy for comprehensive coverage. Remember that adding riders will increase the overall premium, so choose wisely based on your requirements and budget.

Pay the Term Insurance Premium Online

After selecting the term insurance plan and additional riders, the final step is paying the premium online. Most insurance companies provide a seamless and secure online payment process. You can choose from various payment methods, including credit/debit cards, net banking, and UPI. Ensure the website is secure, and read the terms and conditions carefully before paying. Once the payment is made, you will receive a confirmation and the policy document via email.

How much Term Cover Do I Need?

Determining the right amount of term insurance coverage involves evaluating various factors influencing your insurance needs. Consider the following factors to help you decide how much term insurance will be sufficient for your family:

Your Current Income

Experts generally recommend a term insurance cover approximately 15 to 20 times your annual income. For instance, if your yearly income is ₹10 lakhs, the term cover should range between ₹1.5 Cr to ₹2 Cr. Depending on other factors, you may require more or less coverage.

Your Age

Age plays a significant role in determining your insurance needs, as it correlates with your level of responsibility. Early in your career, you might have fewer responsibilities. As you age, your responsibilities typically increase, necessitating higher coverage.

Your Financial Liabilities and Assets

Your term insurance should be sufficient to cover outstanding debts and loans in the event of your untimely demise. Additionally, consider the market value of your financial assets, as they can help offset liabilities or achieve financial goals.

Your Financial Goals

The main objective of a term insurance plan is to ensure your family can meet their financial goals while maintaining their standard of living. Consider the following financial objectives when determining your coverage needs:

  • Child’s higher education
  • Upcoming family wedding expenses
  • Building a retirement corpus
  • Buying a home

Premium You Can Afford

Affordability is crucial, as premiums should comfortably fit within your disposable income. While a higher term cover amount may be appealing, excessively high premiums could lead to payment defaults and policy lapses. Ensure the premium is manageable within your financial means.

Who Should Buy Term Insurance?

Buying a term plan is beneficial for everyone. Depending upon the phase of life you are in, it can significantly impact your financial circumstances. Following are examples of people who can opt for a term plan:

Newly Employed

Young adults starting their careers and earning an income should buy term insurance. Term insurance will provide financial security to their loved ones in case of any unfortunate events. Moreover, the premium for term insurance is relatively lower for younger individuals, making it an affordable option.

Married Couple

Married couples planning to start a family should consider purchasing term insurance. In case of the unfortunate demise of one of the spouses, the term policy will provide financial support to the surviving spouse and their children.

Young Parents

Being parents, If you have young children, term insurance should be on your list. Children depend on their parents for their education and upbringing, and a sudden loss of income can disrupt their lives. A term insurance policy can provide a safety net for your children’s future and ensure they are not deprived of opportunities due to a lack of funds.

Single People With Debt

Even if you are single and do not have any dependents, you can still need term insurance if you have outstanding debts like a home loan or a car loan. Your debts can burden your family in the event of your demise. A term insurance policy can ensure that your debts are paid off and your family is not loaded with unnecessary financial liabilities.

Wrapping Up

Now that you know about term insurance and its many benefits, this is the ideal time to secure your family’s future. The most significant reason term insurance is essential is that it not only acts as a source of lost income but also helps your family pay debts and living expenses. So do not wait; research, compare, and consult a financial advisor to choose the best term insurance plan that suits your requirements.

FAQs on What is Term Insurance

1

How does term insurance work?

Term insurance provides coverage for a specified period. If the insured person passes away during this term, the beneficiaries receive the death benefit. If the insured survives the term, there is no payout.

2

How are premiums determined?

Premiums are based on factors like the insured’s age, health, lifestyle, the sum assured, and the policy term. Insurers assess these factors to determine the risk and set the premium accordingly.

3

Can I convert my term insurance to a permanent policy?

Yes, many term insurance policies offer a conversion option that allows you to convert your term policy into a permanent one without undergoing a medical exam, subject to certain conditions and timeframes.

4

What happens if I stop paying premiums?

If you stop paying premiums, the policy will lapse, and the coverage will cease. This means your beneficiaries will not receive death benefits if you pass away after the policy lapses.

5

How do I choose the right term length?

Choose a term length that covers the period your dependents will rely on your income. Consider factors like the age of your children, the duration of your mortgage, and your retirement plans.

6

Can I have multiple-term insurance policies?

You can have multiple-term insurance policies to meet different financial goals and cover varying needs. Ensure the total coverage aligns with your financial responsibilities and the premiums are manageable.

7

What is a rider in term insurance?

A rider is an additional benefit that can be added to your term insurance policy for extra coverage. Common riders include critical illness cover, accidental death benefit, and waiver of premium, enhancing the base policy’s protection.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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