Term Insurance

A term insurance policy is a pure protection life insurance. If the policyholder/insured passes away during the policy's term, the nominees will receive a sizable payout from the term insurance policy. The financial benefit from the policy is the death benefit, which you can select when buying the policy as the sum assured. In the event of an unfortunate death, the term life insurance cover will provide a large sum of money to the beneficiaries so that they can:

1. Look after their regular monthly living expenses.
2. Pay off any financial liabilities, such as a car loan or housing loan.
3. Invest money towards important life goals such as children’s education, marriage, and building a retirement fund for the spouse.

Term insurance is the most traditional form of life insurance, offering financial protection for a specified period. In most term insurance plans, the premium remains fixed throughout the policy term and is determined based on factors such as the policyholder's age and risk profile at the time of purchase.

For example, Ankit, a 32-year-old salaried professional earning ₹12 lakh annually, purchases a term insurance plan with a sum assured of ₹1 crore for a 30-year policy term. He pays an annual premium of around ₹12,000-₹15,000, depending on the plan and benefits chosen. If Ankit passes away during the policy term, the insurer pays the ₹1 crore death benefit to his nominee. His family can use this amount to manage household expenses, repay outstanding loans, fund his children's education, and maintain their financial stability. If Ankit survives the policy term, no maturity benefit is payable unless he has opted for a Return of Premium (TROP) variant.

In simple terms, this is how a term insurance works: 

• Choosing the cover: You need to buy a policy based on various factors such as age, income, lifestyle habits, needs, inflation, etc

• Adding Required Benefits: Add needed add-on covers, such as critical illness and premium waiver, and select the duration of the policy

• Filling Claim Details: Fill in the correct nominee details so that they don’t have problems while claiming the sum assured

• Buying the Policy: Choose how frequently to pay the premium for these policies, such as single pay, limited pay or regular pay

There are several reasons to buy a term policy. Term Insurance is most basic type of life insurance, which provides reasonable rates and coverage for a predetermined amount of time. Throughout the policy period, it provides both financial security and life insurance. Besides safeguarding your life, the following are reasons why you should consider buying a term plan:

• Financial Security for Your Family: Ensures your loved ones receive financial support in your absence

• Income and Salary Protection: Monthly income payout options can help replace your income and support your family's day-to-day expenses

• High Life Cover at Affordable Premiums: Term plans offer substantial coverage at relatively low premium rates

• Protection Against Outstanding Liabilities: Helps your family repay loans and other financial obligations without additional stress

• Support for Future Financial Goals: Assists in funding children's education, marriage, and other long-term goals

• Flexible Payout Options: Choose from lump-sum payouts, monthly income, increasing income, or a combination of both

Insurance experts recommend buying term insurance plans covering 15-20 times your annual income. For example, if your yearly salary is ₹8 lakh, a term insurance plan must include a minimum of ₹1 crore term plan. Two commonly used methods to estimate the right sum assured are the DIME Method and the Human Life Value (HLV) Method.

1. DIME Method: The DIME method helps estimate your insurance needs by considering four key financial obligations:
   
   
   • Debt: Outstanding liabilities such as personal loans, vehicle loans, or credit card dues
   • Income Replacement: The amount your family would need to maintain their lifestyle and meet day-to-day expenses in your absence
   • Mortgage: Any outstanding home loan or property-related liabilities
   • Education: Future educational expenses of your children and other long-term financial goals
     
     Suppose you have,
   • Outstanding debts of ₹5 lakh
   • Annual income of ₹15 lakh
   • Home loan balance of ₹1 crore
   • Estimated education expenses of ₹25 lakh
     
     In this case, your family's financial requirement could exceed ₹1.4 crore. A term insurance cover of around ₹1.5 crore may help provide adequate financial protection against these obligations.
2. Human Life Value (HLV) Method: The Human Life Value (HLV) method is a more comprehensive approach that estimates the economic value of an individual's future earnings. It takes into account factors such as current income, expected salary growth, age, retirement timeline, existing assets, liabilities, and future financial commitments. Here are some of the factors:
   
   
   • Age: Younger adults can generally pay premiums for a longer duration and are usually charged lower premium rates. Older applicants may face higher premiums due to higher health-related risk.
   • Current Cost of Family: Each family has its own lifestyle and expenses. The amount needed to cover those regular expenses will vary from family to family. You don't want your family's lifestyle to suffer if something happens to you. Hence, you must consider the current expenses to ensure you buy a term insurance plan with the right sum assured.
   • Education: Your child’s future depends on your savings. Term insurance allows you to protect your child’s future even if you are not around. You don't want your children's education interrupted due to financial problems. Calculate the sum assured that covers children's education and buy the right term insurance plan.
   • Wedding: Financial issues may impact your child’s marriage. If you are concerned about your children's wedding and want them to have the best, whether you are there or not, you must consider it while calculating the sum assured. The best term life insurance plan helps you at every stage of life, no matter what.
   • Premium: Choose a premium amount that comfortably fits your budget so that you can continue the policy without financial strain. Also, select a suitable premium payment option, such as single pay, limited pay, or regular pay, based on your income and financial goals.
3. 1 Crore Term Insurance: A ₹1 crore term insurance plan is among the most popular coverage options for salaried individuals and young professionals. It is often considered a suitable starting point for individuals earning between ₹8 lakh and ₹15 lakh annually, as it may provide financial protection equivalent to approximately 10-15 times their annual income.
   
   However, the ideal coverage amount should not be based solely on income. Factors such as outstanding loans, family expenses, children's education, future financial goals, and inflation should also be considered when determining whether a ₹1 crore cover is adequate for your family's needs.

A term insurance plan is one of the essential financial tools in your life. You must buy term life insurance coverage if you have dependents or relatives who would suffer financially in your absence. Since financial protection matters at every stage of a family's journey, different milestones require unique coverage, such as:

There are different types of term insurance plans that you can buy. Here’s a list of term insurance plans to choose from that may help you secure the dreams and aspirations of your loved ones.

• Level Premium Term Insurance Plan: A level premium term insurance plan pays a fixed sum regularly for a specific amount of life cover. It is also called a standard term plan because the sum assured and policy premiums do not change throughout the policy's tenure.
  
  For example, if you buy a ₹1 crore term insurance plan for 30 years at 30, you may need to pay about ₹10,000 per year as a premium. You will pay the same premium regularly for the next 30 years, and your coverage amount will remain the same throughout the term of the insurance policy's tenure. Once you complete the 30-year tenure, the term insurance plan will simply expire.
• Whole Life Term Insurance: A whole life insurance plan allows you to use your term cover as a tool of wealth transfer to the next generation. The unique feature of the whole life plan is that the cover continues till the age of 99. Thus, the benefit payout from this term life insurance plan is almost certain.
  
  For example, you purchase a ₹1 crore term insurance plan for your whole life and choose to pay till 60. The term insurance plan will cover your family in case of early demise during your working years, like the standard term insurance plan. After retirement, the plan will pay the benefit even in the case of natural death. However, if you survive the term of the policy, i.e., you attain the age of 99, the policy pays the entire sum assured to you.
• Increasing Term Insurance Plan: An increasing term life insurance plan is similar to a standard term plan with one unique difference. The sum assured grows every year by a fixed percentage of the base sum assured.
  
  For example, assume that you buy an increasing term cover with a ₹1 crore base sum assured. The life cover will grow at a rate of 5% per year. In the second year, your total life cover will be ₹1.05 crore, in the third, ₹1.1 crore, and so on.
  
  The growth only stops in the following three cases:
  
  
  1. The term insurance plan expires; that is, the policy tenure is over
  2. A claim is made on the policy
  3. The total available sum assured becomes 200% of the base sum assured; i.e. the cover started with ₹1 crore and is now ₹2 crore
• Decreasing Term Insurance Plan: A decreasing term plan is a term insurance policy where the life cover and sum assured continue to decrease over time. Such term insurance plans are usually linked to a long-term loan and protect the borrower’s family in the event of the borrower’s early death. When linked to a loan scheme, the tenure of this term insurance plan is also limited to the loan tenure. The sum assured declines in line with the principal loan balance.
  
  For example, Rahul buys a decreasing term insurance policy with a sum assured of ₹1 crore and a decreasing rate of 5% per year. If he dies in the second year of the policy, his family will receive ₹95 lakhs, which is ₹1 crore less 5%.
• Joint Life Term Insurance Plan: This term insurance plan allows you to add your spouse under the same cover. This addition is also applicable to a homemaker spouse. The biggest advantage of buying the best term plan jointly is that the surviving spouse may not need to pay the premiums to continue their life cover after a claim. If you are looking for a smart term plan that covers you and your partner, then iSelect Smart360 Term Plan is your go-to option, as it allows you to add your spouse to the same policy. Another aspect is that you can manage a single policy far more easily. You can select any option while searching for the best term insurance plan.
• Convertible Term Insurance Plan: Convertible term plans are those that you can convert to another life insurance plan after buying. Usually, you can convert this term plan to a whole life or guaranteed savings plan. The conversion window could be limited to the first few years of purchase. What the convertible plan can change to is also determined by the insurer and is, in some sense, limited.
  
  For example, you bought ₹50 lakhs of term insurance at 25. Before reaching 30, you decide to use whole life insurance with added benefits. When you convert the plan, the premium and sum assured are adjusted to suit your needs.
• Group Term Insurance Plan: Group term life insurance is a popular employee benefit for many companies today. Insurance helps employers secure their employees’ families financially, helping the workforce focus and relax about the safety of their family’s future.
  
  Group term insurance is a type of life insurance in which a single contract covers an entire group of people. Typically, a policy owner is an employer or business, such as a trade union, and the policy covers employees or team members. Group-term insurance is often provided as part of a comprehensive employee benefits package.
  
  This is a win-win deal for both the employer and employees. Also, if you do not have any other insurance, group term life insurance will offer a basic safety umbrella.
• Term Insurance with Return of Premium (TROP): A Term Insurance with Return of Premium (TROP) plan combines life insurance protection with a survival benefit. If the policyholder passes away during the policy term, the nominee receives the sum assured. However, if the policyholder survives the policy term, the insurer refunds the eligible base premiums paid during the policy tenure, subject to the policy terms and conditions.
  
  Since TROP plans offer both life cover and premium refund benefits, they generally come with higher premiums than standard term insurance plans. They are suitable for individuals who want financial protection for their loved ones while also receiving their premiums back if no claim is made.

Choosing the right term insurance plan requires careful evaluation of multiple factors to ensure your family's long-term financial security. Here are some key aspects to consider before making a decision:

• Claim Settlement Ratio: The Claim Settlement Ratio indicates the percentage of claims settled by an insurer compared to the total claims received. A higher ratio generally reflects a stronger claim settlement track record.
• Solvency Ratio: The solvency ratio measures an insurer's financial ability to meet its long-term obligations and settle claims. As per regulatory requirements, insurers should maintain a solvency ratio of at least 1.5, with higher ratios indicating greater financial strength.
• Customer Experience: Look for insurers that offer a seamless customer experience through efficient onboarding, responsive customer support, digital services, and hassle-free claim processes.
• Benefits and Riders: Evaluate the range of benefits and rider options available, such as critical illness cover, accidental death benefit, waiver of premium, and income payout options, to enhance your protection.
• Adequate Sum Assured: Choose a coverage amount that aligns with your income, liabilities, future financial goals, and family responsibilities. Financial experts often recommend coverage of 15–20 times your annual income.
• Premium Affordability: Select a plan with premiums that fit comfortably within your budget. This helps ensure that you can maintain the policy throughout the entire coverage period without financial strain.
• Payout Options: Review the payout options offered by the insurer, such as lump-sum payouts, monthly income, increasing monthly income, or a combination of lump sum and regular income. Choose the option that best suits your family's financial needs.
• Free Look Period: Check the free look period available under the policy. This period allows you to review the policy terms and conditions after purchase and cancel the policy within the specified timeframe if it does not meet your expectations, subject to applicable terms and conditions.

The right time to buy a term insurance policy is when you receive your first pay cheque. Buying a term life insurance policy early gives you a cost advantage. With term plans like Young Term Plan, you can continue to increase your term cover as your life progresses. 

You can increase your term cover without buying a new term plan, keeping the safety umbrella growing with your family’s safety needs.

The premium cost for a male, non-smoking proposer under Young Term Plan is given below, for a ₹1 crore term cover of 30 years with regular premium payment mode.

The duration of a term plan depends on when you see yourself fulfiling all your goals. Choose the duration based on your and your family’s future needs. Consider these factors when deciding on the duration of a term insurance policy.

1. Financial Liability: Your financial liabilities will help you decide the policy terms you need. For instance, if an individual has a 10-year loan, the term insurance policy needs 10 years.

2. Dependents: Considering how long your loved ones will be financially dependent on you will help you decide the terms of your policy. Term life insurance policies help your dependents pay their expenses in your absence.

3. Large Expenses: It is a large one-time expense in the future. For example, if your child is 10 years old and you buy term insurance to cover their marriage or education, the policy duration could be 20-25 years.

4. Age: You should buy the best term plan at a younger age but for a longer duration. If you are 30 and opt for a 10-year plan, it will expire when you are 40. There is a lower chance that you will need coverage before this age.

The premium you pay for a term insurance plan depends on several factors that help insurers assess the level of risk associated with providing coverage. Understanding these factors can help you choose a suitable plan and estimate your insurance costs more accurately.

1. Age: Age is one of the most significant factors affecting term insurance premiums. Younger individuals generally pay lower premiums because they are considered to have a lower mortality risk. As age increases, premiums typically become higher.
2. Gender: Insurers may consider gender while determining premiums, as life expectancy and health risk patterns can vary between males and females. In many cases, women may be offered lower premiums due to their longer average life expectancy.
3. Smoking Status: Smoking and tobacco consumption can significantly increase term insurance premiums. Smokers are considered to have a higher risk of developing serious health conditions, such as heart disease, lung disease, and cancer. As a result, they generally pay higher premiums than non-smokers.
4. Occupation: Your profession can influence your premium amount. Individuals working in high-risk occupations, such as mining, construction, aviation, or offshore operations, may be charged higher premiums compared to those in lower-risk jobs.
5. Health Condition and Medical History: Existing medical conditions, family medical history, and overall health status play an important role in premium calculation. Individuals with good health profiles are often eligible for more favourable premium rates.
6. Coverage Amount: The higher the sum assured you choose, the higher the premium is likely to be. Selecting an appropriate coverage amount based on your financial responsibilities is essential.
7. Policy Term: Longer policy terms generally result in higher overall premiums because the insurer provides coverage for a more extended period.

When you're young, you're more likely to find cheaper premium insurance because your mortality risk is minimal. You may also have additional debts, liabilities, and financial obligations later in life. As a result, it is preferable to purchase a term insurance policy when you are young, preferably in your twenties. As soon as you start your first job, you should purchase a term life insurance plan. Premiums increase as you get older. As a result, the sooner you buy - the better. As you become older, you get closer to your life expectancy, which increases your insurance costs.

A smooth and timely claim settlement process ensures that your loved ones receive financial support when they need it the most. While the exact requirements may vary by insurer, the claim process generally involves the following steps:

1. Notify the Insurer: The nominee or claimant should inform the insurance company about the policyholder's demise as soon as possible. This can usually be done online, through customer care, or by visiting a branch office.
   
   
2. Submit the Required Documents: The claimant must submit the necessary documents, which typically include:
   
   
   • Duly filled claim form
   • Death certificate of the policyholder
   • Original policy document (if required)
   • Identity and address proof of the nominee/claimant
   • Bank account details for claim payout
   • Any additional documents requested by the insurer
3. Claim Verification: The insurer reviews the submitted documents and verifies the claim details according to the policy terms and conditions. Additional information may be requested if required.
   
   
4. Receive the Claim Payout: Once the claim is approved, the insurer disburses the benefit to the nominee based on the selected payout option, such as a lump sum, monthly income, or a combination of both.

A term insurance claim can be settled smoothly when accurate information is provided and policy requirements are met. Taking a few precautions while purchasing and maintaining the policy can significantly reduce the chances of claim rejection.

1. Disclose All Information Honestly: Provide complete and accurate details about your health condition, medical history, occupation, lifestyle habits, and existing insurance policies during the application process. Non-disclosure or misrepresentation may lead to claim rejection.
   
   
2. Provide Accurate Personal Details: Ensure that information such as your name, date of birth, contact details, income, and nominee information is correct and consistent across all documents submitted to the insurer.
   
   
3. Pay Premiums on Time: Timely premium payments help keep the policy active. Missing premium payments beyond the grace period may result in policy lapse and loss of coverage.
   
   
4. Keep Nominee Details Updated: Review and update nominee details whenever there is a significant life event, such as marriage, divorce, or the birth of a child. Accurate nominee information helps prevent delays during claim settlement.
   
   
5. Read Policy Exclusions Carefully: Understand the policy terms, conditions, waiting periods, and exclusions before purchasing the plan. Knowing what is and is not covered can help avoid misunderstandings at the time of claim.
   
   
6. Maintain Relevant Documents: Keep policy documents, premium payment receipts, identity proofs, and medical records safely stored and easily accessible for your family when needed.
   
   
7. Inform the Insurer About Major Changes: If there are significant changes in your health, occupation, or lifestyle that require disclosure under the policy terms, notify the insurer promptly.
   
   
8. Purchase the Policy Early: Buying term insurance at a younger age often involves fewer health-related complications and disclosures, making the underwriting and future claim process smoother.

Buying a term insurance plan is an important financial decision. Avoiding common mistakes can help ensure that your loved ones receive adequate financial protection when they need it most. Here are a few common mistakes that you should avoid at all costs. 

1. Delaying the Purchase: Many individuals postpone buying term insurance until later in life. Buying a policy at a young age can help you secure higher coverage at lower premium rates.
   
   
2. Choosing Insufficient Coverage: Selecting a low sum assured may leave your family financially vulnerable. Consider your income, liabilities, future goals, and dependents while determining the appropriate coverage amount.
   
   
3. Ignoring Riders: Riders such as critical illness cover, accidental death benefit, and waiver of premium can enhance your protection. Overlooking these optional benefits may result in coverage gaps.
   
   
4. Opting for a Short Policy Term: Choosing a policy term that ends before your major financial responsibilities are fulfilled may leave your family underprotected. Ideally, the coverage period should align with your earning years and long-term obligations.
   
   
5. Providing Inaccurate Information: Incorrect or incomplete disclosure of health conditions, lifestyle habits, income, or occupation can lead to complications during claim settlement. Always provide accurate information when purchasing a policy.
   
   
6. Focusing Only on Premium Cost: Selecting a plan solely because it has the lowest premium may not provide adequate coverage or benefits. Evaluate the policy's features, claim settlement record, and rider options as well.

An important aspect when buying a term insurance policy is paperwork. Before granting you insurance, the insurer needs to review financial information and documents. The following list of paperwork is needed when buying a term insurance policy:

1. Identity Verification:

An official identity verification is helpful when evaluating the possibility of fraud and theft with a prospective policy buyer. Required documents to verify your identity:

• PAN Card

• AADHAAR Card

• Passport

• Voter ID Card

2. Proof of Address:

You will then need to present documentation of your permanent address. It is necessary to lessen the likelihood of fraud. It might be necessary for you to share:

• Bills for electricity and phone/mobile

• AADHAAR Card,  Passport, Ration Card

3. Age Proof:

Most term insurance providers also ask for an age-proof document to ensure you meet the eligible age range. Also, your age affects the premium of the term insurance plan you buy. To prove your age, you may have to share:

• Birth Certificate

• School or College Leaving Certificate

• Marriage Certificate

4. Proof of Income:

The policyholder should be able to pay the premiums required for the entire tenure of their policy. Insurance providers ask policyholders for certified documents of their source and type of income to ensure this. The size of the sum assured for your term insurance policy is also heavily influenced by your income documentation.

• Pay Slips for the past three months

• The last three assessment years' income tax returns (ITR) for the previous six months

• Bank Statement with your Pay/Salary for the Last Three Assessment Years

• Form 16 (Recent) Audited Profit & Loss Account; and Balance Sheet

• Most recent wage certificate issued by your employer (Form 26 AS)

5. Health Reports:

The cost of a term insurance policy is determined by your present health status as well as any potential hazards. When you apply for a term insurance policy, the insurer could request that you take medical exams. In addition to the documents listed above, you might also need to submit recent passport-size photos.

Conclusion

Term insurance plays a crucial role in protecting your family’s financial future at an affordable cost. By selecting the appropriate sum assured, policy duration, and riders, you can ensure long-term financial stability for your dependents. Evaluating factors such as claim settlement ratio, tax benefits, and premium affordability helps you select a term insurance plan that aligns with your life goals and responsibilities.