What is Life Term Insurance Plan, Benefits and Eligibility

what is life term insurance

A Life Term Insurance Plan is a pure protection policy that provides financial coverage to your family in case of your untimely demise during the policy term. It offers high coverage at affordable premiums and is one of the most essential tools for long-term financial security.

Table of Contents

What is Life Term Insurance Plan?

  • Term life Insurance plan is the most simplest and affordable form of life insurance plan from other Types of Life Insurance which provides financial protection to the family of life insured at the most affordable rates.
  • These policies offers only guaranteed death benefit and does not have any feature of a savings component.
  • In case of death of the insured individual during the policy term, the death benefit is paid by the company to its nominee.
  • With term life insurance plan, one can get a large amount of life cover(i.e. sum assured) at a relatively low premium rate.
  • The sum assured amount is paid out to the nominee in case of the death of the person insured during the term of the policy.

Key Features of Term Insurance

FeatureDescription
🔒 Death BenefitLump sum paid to nominee on policyholder’s death during the term
💰 Affordable PremiumsLower cost compared to other life insurance plans
📈 High CoverageCoverage up to ₹1 crore or more
🧾 Tax BenefitsDeductions under Section 80C and 10(10D)
🔁 Flexible Payout OptionsLump sum, monthly income, or staggered payouts
📅 Policy TermRanges from 5 to 40 years or till age 99
🔄 Return of Premium OptionRefund of premiums if policyholder survives the term
🧍‍♂️ Health-Based DiscountsLower premiums for non-smokers and healthy individuals

ALSO READ: How to Build Wealth on Rs. 10000 Salary

Let us now understand How Term Life Insurance Works.

How Term Insurance Works?

A term life insurance policy is the simplest / purest form of life insurance : You pay a premium for a period of time – typically between 10 and 30 years or as you choose – and if you die during that time a cash benefit is paid to your family (or anyone else you name as your nominee).

  • Filling out the proposal form :
    You need to disclose the following information in the term plan application form:
    – past or current medical history
    – current health conditions
    – lifestyle habits
    – age
    – annual income
    – nature of your profession

Factors that can increase the premium amount include:
– A higher age
– Unhealthy habits like smoking
– Risk-prone hobbies like skydiving
– Hazardous professions
– Chronic health problems

  • Decide your life cover: Your coverage should be enough to meet your dependents’ current living expenses and future needs. Children’s college fees, children marriage, spouses’ old-age needs, and pending liabilities are some of the factors to consider.
  • Premium Payment Mode: Term plans insurance permit one-time payment of the entire premium. Or you can go for regular payments throughout the policy period or for a limited time-frame.
  • Add extra riders to increase death benefits: You can increase your base coverage with riders for a negligible rise in the premium. The policyholder can attach riders to its term plan while taking, thereby enhancing the value of the policy. So by opting for a critical illness rider for example, he/she is entitled to receive the sum assured on being diagnosed with the critical illness. This is in addition to the death benefit of an equal amount on death over the term of the policy. There are other riders to like: loss of employment cover, accidental death benefit rider, accidental disability benefit rider, permanent disability cover, waiver of premium rider ,income benefit rider, and many more such riders. The policyholder should select riders based on his/her specific needs to make the life cover more suitable and meaningful. Such add-ons provide extra payouts, covering contingencies, such as deaths due to accidents.
  • Reviewing the premium quote: Based on your details, the insurer provides a premium quotation. Then, when you make the policy payment, you get coverage.
  • Assigning a nominee: Life assured need to name the person who will receive his/her term plan’s monetary benefits. It should be an immediate family member who will take care of his/her dependents.

Conditions and Eligibility to buy Life Term Insurance

  • Age criteria: In most cases, any person who is 18 or above can get a term life insurance policy, while the maximum age limit goes up to 65 years. The age of the policyholder is a crucial factor in premium calculation. As per the best practice, the sum assured should always be a minimum of 10 times your annual income, if you choose a higher range, that’s even better.
  • Income proof: Buying term insurance without income proof is not possible. Your income proof helps the insurer to determine your overall financial worth and your ability to pay premiums. Submitting your income proof can also help you receive lower premiums.
  • Medical Tests: It is mandatory to undergo a medical test in most cases while buying term insurance. A medical test helps the insurance company to assess any health risks that may impact the policyholder. It is considered to decide the premium of the plan.
  • Lifestyle Habits: The term insurance premium for the person who smokes will always be higher than for non-smokers because they are more prone to significant health risk and hence, require more risk coverage.
  • Education Qualification: The minimum education qualification required to buy a term life insurance plan is graduation. However, this may vary from insurer to insurer.
  • Citizenship: Anyone residing in India can buy term insurance. The term insurance eligibility remains the same if he shifts abroad for academics or work purposes after the purchase. However, NRIs or PIOs can also enjoy the benefits of a term insurance plan in India.

ALSO READ: Why Term Life Insurance is Better than Money Back Plans

Who Should Buy Term Insurance?

Life StageWhy It’s Needed
Young ProfessionalsLock in low premiums early
Married IndividualsProtect spouse and future children
ParentsSecure children’s education and lifestyle
Loan HoldersCover liabilities like home or personal loans
Business OwnersProtect business continuity and family income

Benefits of having Life Term Insurance

Term insurance plans offer financial security for the entire family in case of the unfortunate death of the policyholder. Also, he/she can get optional coverage for critical illnesses or accidental death. Policy holder is covered for a long duration, while the premiums are affordable.

Term insurance offers multiple benefits to customers. Here are a few you should be aware of:

  • Affordable Premiums – You can get a high-value life cover from a term insurance plan by paying an affordable premium amount of ₹ 540/- p.m2a. Premium payments can be made either monthly/half-yearly/yearly. The earlier you buy a term insurance plan, the lower the premium amount you have to pay.
    ~Whole Life Cover – Term insurance plans offer substantially longer coverage. Whole life insurance plans offer coverage till the age of 99 years.
  • Payout of Sum Insured – In case of the unfortunate demise of the person insured, the family members will receive the sum assured as a payout. The policyholder can choose for this payout to be in the form of a lump sum, an income that is either monthly or annual, a combination of lump sum and income or an increasing income at the inception. This will help take care of financial needs and household expenses among other costs.
  • Critical Illness Coverage – In case optional Critical Illness Coverage is included in your term insurance plan, you will get a lump sum payout upon diagnosis of any critical illness that is covered in the plan.
  • Accidental Death Benefit – You can add the Accidental Death Benefit to your term insurance plan. This will offer protection against any mishaps in the future.
  • Coverage for Terminal Illnesses -Term insurance plans can give you lump sum payouts in case of diagnosis of terminal illnesses such as AIDS.
  • Tax Benefits: You can get tax benefits on premiums paid under Section 80C along with premiums paid towards critical illness benefit under Section 80D. The lump sum amount received by nominees as the sum assured/death benefit is also exempted from taxes subject to Section 10 (10D) of the Income Tax Act, 1961.
  • Return of Premium (ROP): A term insurance policy with the ROP feature can be a helpful feature that allows you to receive your premiums on outliving your life insurance plan.
  • Safety for loans and other assets: Another benefit of a term insurance plan is that it makes it easier for you to take out a personal, car or home loan. Term insurance plans act as safety for a loan, i.e, in case of an emergency or untimely death, the family can repay the loan using the term insurance death benefit pay-out and rid themselves of any debt. Thus, term life insurance policies can help take care of your debt without burdening your family or affecting their lifestyle.

ALSO READ: Types of General Insurance in India

Types of Life Term Insurance

Below are some of the types of Life Term Insurance:

Without return of premium term insurance

This is also know as Level Term Insurance plan. The basic and the simple form of term life insurance is known as a without return of premium term insurance or level term plan. In this plan, the sum assured chosen at the inception of the policy remains same throughout the policy term. The death benefit is paid to the nominees in case something happens to the policyholder or Life assured. Premium paid by the policy holder is very minimal and affordable to policyholder on annual basis.

With return of premium term insurance

Life Term plan with return of premium is a popular type of plan that offers back all the premiums paid by the policyholder if they survive after the policy term is over. premium paid by policyholder is high as compared to without return of premium term life insurance.

Term plan with riders

Term plan with riders comes with various rider options such as accidental death cover, critical illness cover, loss of employment cover, accidental disability benefit rider, permanent disability cover, waiver of premium rider, income benefit rider, and many more such riders which can be opted along with normal term life insurance by paying very less premium amount.

One time premium term life insurance plans

Also known as Single premium term insurance plans, can offer the convenience of a one-time payment. It is very much suitable option for those individuals who have a lump sum money or who wishes to pay one time or are uncertain about their ability to make regular premium payments. Benefits of taking single premium term insurance is that it is very much convenient, affordable, no risk of policy lapse and most important tax benefits.

Renewable Term life insurance plans

Renewable term life insurance plans give the policyholder right to renew their existing term insurance for another period when a term ends, regardless of the state of health. With each new term the premium is increased.

Term Insurance vs Other Life Insurance Plans

CriteriaTerm InsuranceEndowment PlanULIP
PurposePure protectionProtection + savingsProtection + investment
PremiumLowModerate to highHigh
Maturity BenefitNo (unless ROP)YesYes
ReturnsNoneGuaranteedMarket-linked
FlexibilityHighModerateHigh

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How to select Good Life Term Insurance Plan?

Term insurance is a type of life insurance which offers financial coverage against the unfortunate demise of the life insured during the policy term. It is a cost-effective way to provide financial protection for your family members and loved ones. Life insurance provides peace of mind and tax benefits to the policy holder. Keeping your loved ones safe and protected against unfortunate events and circumstances is the utmost priority of any individual. One of the first steps is understanding how to choose term insurance for your family members. An individual can secure his / her family members future effectively when he/she make a wise decision of buying a term life insurance policy .

Few tips while choosing good term insurance policy:

  1. Analyze Your Income:
    One of the common concern among every individual people is how to decide term insurance amount that will be enough for his/her family members or loved ones. It is advisable to analyses your own income to get a more practical picture of it. When an individual can evaluate or analysis his/ her limitations of income, that is the best time one can invest better.
  2. Human life value:
    The main reason for taking life insurance is to offer financial cover to your dependents in absence of bread earner. A policy holder always expect from there insurance policy to provide financial support to the dependents in the absence of policy holder. That is why the life assured must make sure that the life insurance cover is adequate. Hence it is important to calculate term life insurance premium basis human life value (HLV). In simple words the HLV is the individual’s income / salary plus liabilities like loans and other debts and borrowing.
  3. Look at the Existing Liabilities:
    Debts , borrowing and other liabilities are other important factors in the process of choosing good term life insurance. In many scenario life assured has an existing loans and in their absence it is a burden on dependents of policy holder if there is no existing term life insurance plans to repay those loans.
    It is painful for any of us to think of our loved ones bearing the burden of debt repayment without any adequate support. Hence, it is crucial to understand how to choose best term plan by carefully considering the debts and liabilities in life.
  4. Add Riders to the Plan:
    In many scenarios many people are not aware of how to choose a good term life insurance plans and add benefits of the same, hence riders are additional benefits provided by all insurance companies to enhance the coverage of an insurance policy. They can be attached to a base policy at the time of purchase by paying an extra premium.
  5. Check Claim Settlement Ratio of the Insurer:
    The ratio defines the percentage of claims successfully settled by an insurance company compared to the total number of claims received by them in a financial year. It reveals the capacity of an insurance provider to keep their promise of providing financial support in times of need, hence it is very important to check claim settlement ratio while purchasing the term life insurance plans.

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Frequently Asked Questions:

What does a term insurance do?

Term Insurance helps you to provide financial cover for your family in case of your sudden death. You pay the low premium amount compared to other money back plans every year and are assured of a predefined sum up to the policy term. The financial cover provided by the insurance company helps your family to cover for remaining debt and other payables or expenses to be covered in your absence.

Is Term Insurance a good option?

Yes Term Life Insurance is one of the best options if you are looking to cover your family financially in case of your sudden death, with minimum premium amount to be paid every year. Moreover, this premium amount once set, will not increase throughout the term of the policy till it is active.

Do we get the premiums back in Term Insurance?

There is a type of term insurance that returns your premiums paid, but this term insurance comes with higher premium payment compared to the term insurance with low premium payments. So yes you can get the premiums back in term life insurance with return of premium feature.

Which insurance company is best for term plan?

Some of the best insurance companies are ICICI Life, HDFC Life Max Life, etc from where you can buy term life insurance offline or online

Is 50 lakh term insurance enough?

It depends on your financial goals and the amount of debt you have taken. If you need to make a payment of Rs. 20 Lakh than Rs. 50 lakh cover sounds to be a good option that will cover for your debts as well as providing financial stability to your family after your demise. But in case your current debt is around Rs. 70 to rs. 80 Lakh, you need to consider term life insurance of at least Rs. 1 crore or more.

Can I take 2 term insurance?

Yes multiple term insurance against the same policyholder is allowed

What is a good term insurance amount?

Good amount will depend on your total debt and your family’s lifestyle. Add up all the debt in the form of loans and other payables and consider the monthly expenses of your family. At least 5 years expenses must be covered for your family after your demise. Add all the numbers to get the good amount for term insurance.

For example, if your total debt is Rs. 20 lakh and monthly expenses is Rs. 20,000 for your family, considering inflation of 5%, total expenses for 5 years will be around Rs. 13.30 Lakh, which makes total of Rs. 33.30 Lakh. So having Rs. 50 lakh as life cover will cover for all these expenses along with a margin of safety.

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Income Tax Calculator App – FinCalC

For Income Tax Calculation on your mobile device, you can Download my Android App “FinCalC” which I have developed for you to make your income tax calculation easy.

What you can do with this mobile App?

  • Calculate Income Tax for new FY 2024-25 and previous FY 2023-24
  • Enter estimated Investments to check income tax with Old and New Tax Regime
  • Save income tax details and track regularly
  • Know how much to invest more to save income tax
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Use Popular Calculators:

I’d love to hear from you if you have any queries about Personal Finance and Money Management.

JOIN Telegram Group and stay updated with latest Personal Finance News and Topics.

Download our Free Android App – FinCalC to Calculate Income Tax and Interest on various small Saving Schemes in India including PPF, NSC, SIP and lot more.

Follow the Blog and Subscribe to YouTube Channel to stay updated about Personal Finance and Money Management topics.

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