“What is Term Insurance? Benefits, Features and How It Works”

New Delhi : Term insurance is a form of life insurance that offers a substantial amount of life coverage to the policyholder for a certain period of time at an affordable premium. The death benefit will be received by the nominee in the event of the policyholder's unfortunate death. The sum assured will either be paid in a one-time lump sum or in regular payments every month, as chosen by the policyholder at the time of opting for the policy. Term insurance ensures the security of the family in the event of the policyholder’s unexpected demise. 

How Does a Term Life Plan Work?

Understanding what is term insurance and how it works can help individuals make an informed decision regarding their healthcare requirements. 

Step 1: Term Insurance as a Legal Contract

A term plan is a legal contract entered between a policyholder and an insurance company, in which former upon paying regular premium will get financial protection from the latter. This contract remains valid throughout the policy tenure unless any term is breached, such as non-payment of premium or misrepresentation of any facts.

Step 2: Application and Underwriting Process

Next, start with the application process, submitting documents such as identity proof, address proof, and income certificates and undergo medical tests. The underwriting team evaluates the details received to decide the risk profile and premium rates.

Step 3: Determining Your Coverage Needs

Assess the current financial requirements, which include monthly expenses, outstanding loans, and future financial objectives for dependent family members. Consider certain factors such as child’s education, spouse’s financial security, family’s standard of living. 

Step 4: Premium Calculation and Payment

The premium amount is calculated depending on certain factors, such as age, health status, policy tenure, sum assured, and additional riders. The premium can be paid monthly, annually, or in a single instalment. 

Step 5: Nomination

Choose a nominee who will receive the death benefit in the unfortunate event of the policyholder’s demise. 

Step 6: Policy Management and Flexibility

Many plans offer flexibility to adapt to changes in life, such as childbirth, marriage, buying a new house, etc., by enhancing the coverage. It also allows you to add additional riders such as accidental death, disability, and critical illness to enhance the protection at some extra cost.

Step 7: Claim Raising and Settlement

In case of the policyholder’s demise, the nominee should inform the insurance company about the same and submit the required documents. The insurance company settles the claim after processing and verification. 

Features of a Term Life Plan

The following are the features of a term life plan: 

• Affordability

Being a pure risk plan without any investment component included, the premium is quite affordable in comparison to other types of life insurance plans.

• Flexibility in Term Length

This plan allows a policyholder to select the policy tenure from the options available in terms of coverage for 10, 20, or 30 years, aligning with financial objectives. 

• High Sum Assured

These plans offer a high coverage amount, hence providing substantial financial protection to the family members. The death benefit received can be used to pay off financial obligations, cover livelihood expenses, and pay off debts, thus ensuring financial security.

• No Maturity Benefits

This plan does not offer any maturity benefits in case the policyholder survives the term of the plan, thus making the plan affordable due to death benefit coverage only.

Benefits of a Term Insurance Plan

The following are the benefits of a term insurance plan:

• Provides Financial Security for Your Family

The death benefit received helps manage routine expenses, household expenditure, child education costs, hence fulfilling long-term financial objectives.

• Protection against Critical Illness and Accidents

Many term plans provide an option to enhance the coverage through riders, such as critical illness riders, accidental disability, accidental death, waiver of premium, etc., at an additional cost. Critical Illness Insurance can also provide financial support against the financial impact of specified critical illnesses, subject to the policy terms and conditions. 

• Helps Manage Outstanding Liabilities

A considerable amount of sum assured can help in repaying outstanding financial obligations such as home loans, education loans, vehicle loans, or personal loans, hence reducing the financial burden.   

• Offers High Coverage at Affordable Premiums

This plan offers substantial coverage at an affordable premium, making it a cost-effective plan. 

• Acts as a Financial Safety Net

This plan also lets you cope with unexpected financial challenges by providing a lump sum payout that can be used to meet immediate and future financial requirements.

• Offers Tax Benefits

Premium paid towards the plan is eligible for a tax deduction u/s 80C of the Income Tax Act, 1961, subject to applicable provisions. Also, the death benefit received is exempt u/s 10(10D) of the Income Tax Act, 1961, subject to applicable provisions.

• Provides Peace of Mind

Knowing that your family will remain financially secure in case of any uncertainty lets you focus on financial goals, thus providing mental peace.      

Eligibility Criteria

The following are the eligibility parameters to be met while buying a term plan:

• Age: An individual can buy a term plan between the ages of 18 and 65 years.

• Citizenship: The individual should be a citizen of India and residing in India at the time of buying the plan.

• Medical Reports: Many insurance companies ask for medical tests before approving the plan. Hence, to buy a term plan, an individual must be willing to undergo medical tests.

• Habits: In case of smoking or alcohol habits, an individual is required to declare the same in the policy proposal.

• Occupation: An individual is required to mention their job if it’s high-risk, though a policy proposal may not be rejected.

Conclusion

Term insurance provides financial protection to the policyholder’s family members by providing a death benefit during the policy tenure. Selecting the right coverage, policy tenure, and premium can help ensure adequate protection depending on your financial requirements and long-term objectives.

FAQs

1. What is a “Free Look Period”?

The free look period is a specific time, normally 15-30 days after receiving a term plan, where the terms and conditions of the plan can be reviewed, and it can be cancelled for a full refund of the premium amount. 

2. What is the difference between a term plan and a term plan with return of premium?

A term plan offers pure risk cover in case of the policyholder’s untimely demise. If the policyholder survives the term, no other benefit is payable once the tenure ends.

In the case of a term plan with return of premium, family members can avail the death benefit in case of the policyholder’s untimely demise. If the policyholder survives the plan the term plan will provide a return of total premium paid on maturity.