What Is Term Life Insurance And How to Choose One?

A term life insurance is a policy that provides insurance coverage to an individual for a particular term or period. It benefits the nominee financially only if the policy-holder expires during the policy’s specified term.

Read on to know the benefits of term life insurance, its features, documents required to buy term life insurance plans and the payout options you can avail. 

Types of Term Life Insurance

There are 5 types of term life insurance policies, as detailed below: 

1. Increasing term insurance: In an increasing term life insurance, the sum assured increases periodically during the entire tenure of the policy. On the other hand, the premium amount remains the same. However, certain insurance providers have a maximum limit, and the assured sum cannot exceed that amount. 
   The coverage amount will cease to increase after attaining the limit, but the insurance policy will remain effective. This can make an increasing term life insurance plan expensive for some. 
2. Decreasing term insurance: Sum assured payable decreases periodically over the entire tenure of decreasing term insurance. However, the payable premium amount remains the same. 
   Generally, the sum assured reduces to zero when the policy ends. These policies are used to provide protection against specific debts. A decreasing term insurance policy charges a low premium when compared to other term insurance policies. 
3. Level-term insurance: The payable premiums and sum assured remain fixed for the entire policy tenure. Level-term life insurance is India’s most prevalent life insurance policy. 
4. Term Insurance with the return of premium: In this plan, the insurer will have to return the premiums to the insured after maturity. However, this will be applicable only if the policy-holder survives the entire policy period. 
5. Single premium term plan: Here, one can pay the premium for the entire tenure as a lump sum. Premium amounts are generally higher for this plan. 

Features of Term Life Insurance Plans

Here are some of the features of term life insurance policies: 

• Hassle-free payment of premium
  You can pay the premium amount monthly, quarterly, or yearly as per the policyholder’s convenience. 

• Easy to purchase
  You can easily compare various term insurance policies online and choose the one that suits them best. The insurance policy can be purchased online by uploading the required documents on the insurance portal.

• Liability protection
  After getting the term life insurance, you can use the sum assured of a term life insurance plan to protect your family against debt liabilities in the future. It helps to secure the financial future of the family. 

• Long-term protection
  Term insurance policies offer long policy tenures. So, the insured can avail of financial protection for his/her family for a long period.

Benefits of Term Life Insurance Policies

The primary benefits of a term life insurance policy are enumerated below: 

• Affordable
  The premiums of term life insurance policies are quite affordable. It can be as low as 0.1% of the entire sum insured. 

• Higher coverage
  Term life insurance policies provide a higher sum assured than general life insurance policies. It helps the nominee withstand financial hardships if the insured person suddenly passes away. 

• Tax benefits
  Sections 80C, Section 80D and Section 10 (10D) of the Income Tax Act enable taxpayers to seek multiple tax benefits for availing of term life insurance policies. 

• Locked premiums
  When one buys a term life insurance policy, he/she will need to pay the same premium amount for the entire duration of the plan. Young individuals can use this to their advantage as premiums of term life insurance increase with the applicant’s age. By purchasing this policy at an earlier stage in their life, they have to pay a low premium, which is a major benefit. Additionally, regularly depositing money for an insurance policy inculcates financial discipline in young policy-holders. 

• Simple to understand
  An insurance policy provides the sum assured to the nominee after the untimely death of the policyholder. The basic terms and conditions are not difficult to understand. One needs to pay the premium on the stipulated time. 

Documents Required for Term Insurance Plans

Here is the list of documents that are generally required for term insurance policy applications:

• Photo identity card
• Income proof (bank statements, pay slips) 
• Proof of address (Aadhaar card, Driving license etc.)
• Age proof
• Passport size photographs  

Eligibility Criteria for Term Insurance Plans

Enumerated below are the eligibility criteria one must fulfil before applying for a term life insurance policy: 

• One must be a citizen of India. However, PIO (People of Indian Origin) and NRIs (Non-Resident Indians) can avail of this insurance policy as well if they fulfil certain conditions. 

• Individuals need to undergo medical checkups before availing of a term life insurance policy. This allows the insurer to know about the medical issues of an applicant. This information is also used to decide the premium amount of the policy. 

How to Choose the Best Term Life Insurance Plan?

Given below are steps that one can follow to choose the best term life insurance policy: 

• Step 1: Assess your financial responsibilities and check the number of dependents you have.
• Step 2: Check your income and the family’s economic requirements
• Step 3: Analyse existing debts and liabilities.
• Step 4: Compare the various types of term life insurance policies of various insurance companies. Find a policy that suits your financial requirements. 
• Step 4: Check the insurance provider’s claim settlement ratio.
• Step 5: Finally, purchase the term insurance plan that is most suitable. 

How Much Term Insurance Cover Do You Need?

Term insurance cover calculation depends on the following factors:

• Age
• Assets
• Household expenses
• Insurance premiums
• Children’s education and wedding
• Selecting riders/add-ons 

Generally, experts recommend that term life insurance coverage should be 15 to 20 times the annual income of the insured. 

Payout Options in Term Life Insurance

Here are the details of payout options associated with term life insurance policies:

• One-time lump sum payout: The nominee receives a lump sum payout after the untimely death of the policy-holder. 

• One-time lump sum plus fixed monthly payouts: The nominee will receive 100% of the sum assured as a lump sum payout. Additionally, he/she will receive an additional payout every month for the rest of the policy tenure.

• One-time lump sum plus increasing monthly payouts: This category of payout offers a one-time payout after the insured person’s death. In addition, the nominee receives a monthly payout that increases yearly for a fixed tenure.

Factors to Consider before Buying the Right Term Insurance Policy

Given below are factors that one should consider before buying a term life insurance policy: 

• Check coverage amount: One needs to check his/her age, financial responsibilities, requirements, increasing costs and inflation before establishing the coverage amount. 

• Analyse suitability of payout options: Individuals must select a payout option depending on his/her requirement and affordability. The premium amount is dependent on the payout option that the policy-holder will choose. 

• Select policy period: One must choose the policy period carefully based on age and financial responsibilities. 

• Assess policy terms: Individuals should consider the claim settlement ratio, solvency ratio and market reputation before selecting an insurance provider.

Who Should Buy a Term Life Insurance Policy?

People with other family members dependent on them should consider buying term life insurance policies. Here is a list of individuals who might find term life insurance policies suitable. 

• Parent
  Parents are responsible for their children’s education and health expenses. However, a child’s future might get jeopardised if anything happens to them. Parents should consider buying a term life insurance policy because their children are solely dependent on them. Such policies will ensure the coverage of the children’s expenses if, god forbid, anything happens to the parents. 

• Working professionals
  More often than not, an entire family is dependent on the earnings of a single working professional. In such cases, a term life insurance policy will provide financial security to the family in the absence of the working member. 

• Young professionals
  Young people who don’t have dependents and have just started their careers should consider purchasing term life insurance policies. The premium amount for a term life insurance increases with the policyholder’s age. Young individuals can use their age as an advantage and pay low premiums while availing of term life insurance. 

• Newly married couples
  Married couples should opt for term life insurance policies. In case anything happens to the insured person, the spouse will receive financial security in the future. 

• Taxpayers
  Section 80C of the Income Tax Act enables taxpayers to seek deductions for premiums paid for term life insurance policies. Additionally, Section 10 (10D) enables people to seek exemptions for term insurance payouts upon fulfilling certain conditions. 

• Self-employed individuals
  If an individual’s income is dependent on their business, securing the future of the family members becomes all the more important. Self-employed individuals should purchase term life insurance policies to provide economic security to the family in his/her absence. 

• Retirees
  A term insurance policy is a good option for retired people if they have a dependent spouse or child. It gives them an opportunity to leave a financial benefit for their loved ones. 

Also Read: What Is General Insurance: Benefits, Types, List Of Companies And How To Claim

When Should You Buy a Term Insurance Policy?

Here’s when you should opt for a term life insurance policy:

• The early 20s happen to be the most suitable time for one to purchase a term life insurance policy. This is the age when young people start earning. They have to pay low premium amounts if they purchase a term life insurance policy.  

• One can also purchase this policy in their late 20s and early 30s. This is the age when many people get married and start a family. A term life insurance policy is the best instrument to ensure your family’s financial security in your absence.

Why Should You Buy a Term Insurance Policy?

The reasons why one should buy a term life insurance policy are enumerated below:

• If one is the sole breadwinner
  Suppose an individual is the sole earning member of the family. In that case, he/she should consider purchasing a term life insurance policy as it ensures the family’s financial security in his/her absence. 

• If an employer wishes to secure the welfare of employees
  Often, employers term life insurance policy as a welfare measure for their employees. It ensures the financial security of the employee’s family in case of any mishap. Furthermore, employers can also avail of tax benefits for paying the premium for term life insurance policies. 

• If one’s business is cash-strapped
  Insurance policies often demand huge payments from investors. This might leave businessmen short of cash for the growth and development of businesses. A term insurance policy is an affordable option that business owners can use. 

• If one lives on a tight budget
  This insurance policy is ideal for individuals who are on a tight budget and wish to avail the benefits of an insurance policy at an affordable cost. 

Also Read: Understanding All About Sum Assured & Difference Between Sum Assured & Sum Insured

Final Word

There are multiple term life insurance policies that one can choose from to secure their family’s future. Individuals are advised to take their age and financial requirements into account before choosing a suitable insurance policy. Get a term life insurance and secure your family’s future.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.