Term insurance in India is a pure protection life insurance plan that offers financial security to the policyholder’s family in the event of the policyholder’s death during the insurance period. A term plan usually provides maximum coverage at an affordable premium. Life insurance coverage can help dependents meet family needs, settle debts, and achieve long-term financial goals.
Unlike endowment or money-back life insurance plans, a pure term insurance plan does not provide any maturity benefit on survival at the end of the term. The premium for this type of policy is determined by age, sum assured, policy term, health, profession, and other underwriting factors.
How does term insurance work?
The term insurance purchase process is relatively straightforward:
Choose the amount of coverage.
Ajay is a 32-year-old employee, and he wants to protect his family and buy a term plan with a sum assured of 1 crore.
Choose the policy term.
Ajay decides to take a 25-year plan because he wants to ensure his family is protected financially for his working years.
Underwriting and calculating the premium.
The insurer determines the premium based on the insured’s age, health, occupation, and the amount of the sum insured. The underwriter may ask Ajay for personal details during the application process and may require a medical examination. With a term insurance calculator, one can roughly estimate the cost of the policy.
Paying the premium.
Ajay pays the premium according to the payment method and payment term specified in the contract. The policy remains in force for the agreed-upon period if the policyholder pays the premium on time. For policyholders with financial interests across countries, understanding the Double Taxation Avoidance Agreement (DTAA) can also be relevant when considering applicable tax provisions.
Coverage.
Ajay is now protected for the sum assured of 1 crore during the 25-year policy term. He can also add an accidental death rider to his term life insurance policy to get additional benefits for his family in case of his death due to an accident by paying an extra premium. Additionally, he can take advantage of other additional contracts offered by the insurance company, such as a critical illness rider.
Claim and payout.
Ajay dies while his term insurance policy is in force, and his family submits the claim to the insurance company, which pays the sum assured under the contract to his nominee.
Policy maturity.
Usually, a pure term life insurance policy does not pay any maturity benefit upon successful completion of the policy term. However, if Ajay bought a return of premium term plan, he would receive a maturity benefit upon the expiration of his policy term.
Term insurance policies can differ in coverage, premium payment rules, and additional benefits. The most basic term life insurance plan is the level term policy. Other types of term life insurance include:
- Increasing term insurance
- Decreasing term insurance
- Term insurance with return of premium
- Convertible term insurance
- NRI term insurance
- Group term life insurance
Types of term insurance plans
1. Level term insurance
A level term insurance policy is the simplest type of life insurance in India. The sum assured, upon which the premium is calculated, is fixed for the entire policy term. This type of term life insurance may be a good choice for those who want to take out a simple life insurance policy.
2. Increasing term insurance
An increasing term life insurance policy is designed for those who want the sum assured to rise throughout the policy term. The premium depends on the way the sum assured is calculated and the insurance company’s policy.
3. Decreasing term insurance
A decreasing term life insurance policy is the opposite of the increasing term insurance. The sum assured under this policy decreases throughout the policy term. This type of life insurance is suitable for covering some liabilities that will diminish over time.
4. Term insurance with return of premium
This type of term life insurance is an option for those who want to get their premium back if they survive the policy term. Term life insurance with return of premium has a maturity benefit, which, in most cases, is equal to the sum of all premiums paid. Consequently, the premium for such a policy is higher than for a standard level term life insurance.
5. Convertible term insurance
Some term life insurance policies offer a conversion option, which allows the policyholder to convert the original policy into a different one, usually a whole life policy. The ability to convert a term life insurance policy into another one is a convenient option for people whose needs change over time. The terms and conditions of such policies are set individually by the insurance company and must be discussed with the underwriter.
6. NRI term insurance
NRI term life insurance is designed for residents and citizens of India but residing abroad. When applying, in addition to standard documents, the underwriter may request documents confirming the applicant’s residence abroad. For example, an individual researching Term Insurance for NRI in Saudi Arabia may need to provide documents related to their residence and occupation abroad. The terms of the contract also depend on the person’s profession since the insurance company assesses the degree of risk based on the place of work and the person’s activities.
7. Group term life insurance
Group term life insurance is a type of group life insurance. It is a life insurance policy for members of an organization or another closed group (such as staff). The insurance sum depends on the salary and other factors determined by the insurance company underwriting the group contract. This type of life insurance is usually taken out by employers as group life insurance for their employees. However, such a policy is terminated when the employee leaves the job, which is a feature of this type of insurance.
Conclusion
In summary, term life insurance is designed to protect dependents from the financial consequences of the breadwinner’s death during the policy period. Taking out a term life insurance policy helps cover expenses for long-term plans, pay off loans, and other liabilities. A person needs to choose the sum of the insurance, the duration of the contract, and the additional options based on their needs, considering their income, debts, and the needs of their family.
