What is term insurance plan and how does it work?

Death is uncertain. While you may expect to live till your golden old age, misfortune can strike any time and if it does your financial planning goes astray. If you are the bread-winner of your family, your untimely death would be a cause of great financial stress for your dependent family. This is why life insurance plans are required. Life insurance plans cover the risk of premature death thereby providing your family with the required financial assistance. Life insurance policies come in many different variants which are as follows –

Term and whole life insurance policies aim to provide coverage against the risk of premature death and give financial security for your family. Endowment and money back plans are traditional savings oriented insurance plans. They provide insurance cover and also create a savings corpus for your future. Child plans and pension plans are goal-oriented life insurance plans which aim to fulfil your child planning and retirement planning needs, respectively. Unit linked plans, on the other hand, are investment-oriented insurance plans. They promise the benefit of attractive returns through market-linked investments and also provide insurance coverage.

Though there are a variety of life insurance plans available in the market, term insurance plans are the most basic and the most important of all plans. Let’s understand how and why –

Term insurance meaning

A term insurance plan is a pure protection life insurance plan. It offers to provide you with very high coverage levels at affordable premiums. You can also choose the coverage duration. In case of death during the term of the coverage, term insurance plans pay the sum assured to the family. Since you could afford a high sum assured level, your family is financially taken care of after your absence. Thus, through a term insurance plan, you can create financial security for yourself and your family members.

Features of term insurance plans

Term insurance plans come with the following salient features –

1. High sum assured

   The main objective of a term insurance plan is to provide financial security. This security can be achieved only when the coverage level is sufficient enough to cover the financial requirements of your family in your absence. That is why, to ensure that your family is sufficiently secured, term insurance plans allow high coverage levels. You can opt for the desired sum assured based on your financial requirement. Usually, it is recommended that your term insurance coverage should be at least 10 to 12 times your annual income. So, term plans allow you unlimited coverage levels to ensure optimal coverage.

2. Low premiums

   A high sum assured cannot be sustained if the premiums are not affordable. Term plans mostly cover the risk of premature death and so the premiums are very low. In fact, term insurance premiums are the cheapest among all life insurance plans. So, you can choose a high coverage level without having to worry about unaffordable premium rates.

3. Long coverage tenure

   The coverage duration allowed under term plans is long to ensure that you remain covered even in your older ages. Term plans grant you coverage for up to 30 or 35 years depending on the plan that you choose.

4. Different types of plans

   Term plans come in different variants to suit the coverage needs of different individuals. You can, therefore, select a variant which meets your coverage requirements.

5. Riders

   To make your coverage more comprehensive, term insurance plans offer you optional riders. Riders are additional coverage benefits which can be added to your basic policy for enhanced coverage. Some of the popular riders which are available with term plans are as follows –

• Accidental death benefit rider – under this rider, an additional sum assured is paid in case of accidental death
• Accidental death and disablement benefit rider – under this rider, both accidental deaths and disablements are covered. In case of death, an additional sum assured is paid. In case of disablement, the sum assured is paid in instalments for a specified period and the premiums are also waived off
• Critical illness rider – under this rider, a list of critical illnesses are covered. If any illness is diagnosed during the coverage period, a sum assured is paid in a lump sum
• Terminal illness rider – under this rider an additional sum assured is paid if the insured suffers from a terminal illness
• Term rider – under this rider, an additional sum assured would be paid if the insured dies during the policy duration, whether by accident or not.
6. Benefits payable

   Usually, term insurance plans pay only a death benefit if the insured dies during the term of the policy. If the insured survives till the end of the term, no benefit is paid on maturity. However, there are the return of premium term plans which refund the premiums if the plan matures.

7. Tax benefits

   Term insurance plans also provide you with dual tax benefits. The premiums that are paid for the policy qualify as a tax-free deduction under Section 80C of the Income Tax Act. You can claim a deduction of up to INR 1.5 lakhs. The benefit that you receive from the policy is also tax-free. The entire benefit that you receive is completely tax-free in your hands under Section 10 (10D) of the Income Tax Act.

   You can choose as many riders as you want. Under some plans, one or two of the above-mentioned riders can also come as an inbuilt coverage benefit.

Types of term insurance plans

As mentioned earlier, term insurance plans come in different variants. Let’s have a look at these variants –

• Level term plans

These are the basic term insurance plans where the coverage level remains the same throughout the term of the policy.

• Increasing term plans

Under these plans, the sum assured increases every year by a specified percentage. If the insured dies during the term of the plan, the sum assured available in the year of death would be paid. For instance, let’s say that the sum assured increases by 5% every year. Therefore, if you opt for a sum assured of INR 10 lakhs, in the second year it would become INR 10.5 lakhs. In the third year, it would be INR 11 lakhs. In the fourth year it would be INR 11.5 lakhs and so on. If the insured dies in the fourth year, INR 11.5 lakhs would be paid and not INR 10 lakhs which was the original sum assured. Increasing term plans are suitable for those who want their coverage to increase gradually so that their increasing financial responsibilities can be taken care of.

• Decreasing term plans

Contrary to increasing term plans, under decreasing term plans the sum assured reduces every year by a fixed percentage. Decreasing term plans are usually allowed as loan redemption plans. Just like the loan reduces with the repayment that you do, the coverage also reduces to cover the outstanding part of the loan. In case of death of the borrower, the reduced sum assured, representing the outstanding loan would be paid.

• Return of premium term plans

Since term plans pay only a death benefit, many feel that the premiums paid are lost if the plan matures. That is why the return of premium term insurance plans have been designed. These plans refund the premiums that you have paid over the policy duration in case the plan matures and the insured is alive on maturity.

• Monthly income plans

These are a new type of term insurance plans which have become quite popular nowadays. Under these term plans, the death benefit is paid in monthly incomes to the family so that the family gets regular incomes for meeting their financial needs.

• Group term plans

Group term insurance plans are offered to a group of individuals. These plans are meant for registered groups who want to take coverage for their enlisted members. One master policy is issued which covers all the members of the group. A minimum number of members are required to buy a group term insurance plan. The policy is issued for one year after which it can be renewed for continuous coverage. Members who belong to the group are automatically covered under the plan if the group buys the policy. Premiums can be paid by the group itself, its members or partly by the group and partly by its members. Whatever be the mode of premium payment, the life insurance company collects the aggregate premium from the group head itself.

How do term plans work?

When you buy a term insurance policy, you first choose the type of policy that you need. Then you choose the sum assured and coverage duration based on which your premiums are calculated. You are required to pay the premiums over the specified premium paying tenure. If, during the coverage tenure, you face premature death, the policy pays a death benefit to your family. If, on the other hand, you survive the plan duration and you have not chosen a return of premium plan, no benefit would be payable.

Advantages of term insurance plans

Term insurance plans provide you with the following benefits –

1. The premiums are very low and therefore you can afford a considerable sum assured for yourself. If the sum assured is high you can ensure sufficient financial security for your family
2. The plan provides unparalleled coverage which is not provided by any other life insurance plan or investment plan. This coverage is essential to protect against premature death and the financial consequences suffered thereafter
3. The tax benefits provided by the policy also helps you lower your tax liability. This helps you save your hard earned money U/S 80C while at the same time ensuring coverage.

How term insurance premiums are calculated?

The premiums of term insurance plans depend on a lot of factors. These factors affect the premiums negatively as well as positively. Let’s understand these factors and their effect on premiums –

1. Age of the insured

   Premiums are directly linked to the age of the insured. If the age is more, the premiums would also be high. Thus, increasing age has a negative impact on the premium as it increases the premium amount.

2. Sum assured

   The sum assured also affects the premium directly. If the sum assured is high, the premium would also be high.

3. Term of the policy

   The policy tenure is inversely related to the premium. If you choose a higher tenure, the premium would be reduced and vice-versa.

4. Premium paying frequency

   If you pay premiums monthly, the company incurs a higher administration charge. That is why monthly premiums are higher than annual ones.

5. Medical health

   If you are suffering from a medical sickness or if you have any medical ailments, it increases your mortality risk. As such, the premiums also increase.

6. Smoking habits

   If you are a smoker, your mortality risk is high. That is why insurance companies charge a differential premium rate for smokers and non-smokers. The rates are higher for smokers and lower for non-smokers.

7. Gender

   Males have a higher mortality rate than females and that is why premiums for female lives are also cheaper than male lives at the same age.

8. Occupation

   If you are employed in a dangerous occupation which affects your mortality risk, the premiums would be high. For instance, if you are a pilot, air hostess, politician, in defence forces, in police, your mortality risk would rise. Premiums of term insurance plans, therefore, would be higher for individuals engaged in such risky professions.

9. Physical build

   Your height and weight also affects your premium because these parameters determine your health status. Being overweight or underweight is a cause of concern as it makes you unhealthy and increases your mortality risk. To compensate for this increased mortality risk, higher premiums are charged.

10. Riders selected

    If you opt for optional rider coverage benefits, the premiums would increase. Each rider comes at an additional premium because it offers an additional scope of coverage. So, if you choose one or multiple riders, their respective premiums would be added to the premium of the base policy and your overall premium outgo would increase

11. Discounts allowed

    Term insurance plans allow different types of premium discounts which help in lowering the premium charged. If you are eligible for these discounts, your premiums would reduce.

Best term plans in India

Here is a list of some of the best term insurance plans which you can find in the market for your coverage needs –

Name of the plan	Entry age	Coverage duration	Sum assured	Salient features
TATA AIA Sampoorna Raksha	18 years to 70 years	10 years to up to 100 years of age	INR 50 lakhs onwards	· There are four coverage options under the plan · Whole life coverage option is also available
ICICI Pru iProtect Smart	18 years to 65 years	5 years to up to 99 years	Depends on the minimum premium which is INR 2400/year	· You can avail coverage for up to 99 years · The death benefit can be received in four ways · Terminal illness benefit is inbuilt under the plan
HDFC Life Click 2 Protect 3D Plus	18 years to 65 years	5 years to whole of life	INR 10,000 onwards	· There are nine coverage options to choose from · The death benefit can be availed in multiple options
Max Life Online Term Plan Plus	18 years to 60 years	10 years to 50 years	INR 25 lakhs to INR 100 crores	· There are three coverage options · The sum assured can be enhanced at important milestones in your life
AEGON Life iTerm Insurance Plan	18 years to 65 years	5 years to 82 years	INR 25 lakhs onwards	· There are three coverage options and each option provides inbuilt riders · The sum assured can be increased on marriage or child birth

How to buy term insurance plans?

Term insurance plans can be bought through the company’s offices or from a life insurance agent. However, under both these options, you would have to buy the plan offline and would not be able to compare the different plans available in the market. Thus, a better alternative to buy term insurance is to buy it online through Turtlemint. On Turtlemint’s platform you can compare the best term insurance plans offered by leading life insurance companies. To buy, the steps are as follows –

• Visit www.turtlemint.com/life-insurance
• Choose ‘Term Life Plans’ and enter in your valid details like your age, gender, smoking preference, annual income, marital status, etc.
• After the details are entered, you would be able to see a list of the best term insurance plans
• You can compare the available plans on their coverage features and premium rates and then choose the best plan which suits your coverage requirements as well as your pockets
• Fill up an online application form and pay the premium online to buy the policy at the earliest

Documents required for buying term insurance plans

To buy a term insurance plan, the following documents would have to be submitted –

• Proposal form, filled and signed
• Age proof
• Identity proof
• Address proof
• Proof of income
• Recent coloured photographs of the insured and the policyholder (if both are different)

Making a claim under term insurance policies

In case of death of the insured, there occurs a claim in term insurance plans. To make a claim, the following steps should be taken –

• The nominee should fill up a claim form issued by the company and submit it to notify the company of the death of the insured
• The death certificate and other relevant claim related documents would have to be submitted
• The company would verify the details contained in the claim form and check the documents
• If everything’s in order, the claim would be settled

If, on the other hand, you have bought a return of premium policy, you would have to fill up a claim discharge form to receive the maturity claim. This form should be submitted with your bank details and the policy bond and the company would refund your premiums directly to your bank account.

You can also make your term insurance claims through Turtlemint. Turtlemint helps its existing customers in their claim process. So, if you have bought the policy from Turtlemint, inform the company of your claim and the company would do the needful to get your claim settled. To inform, call the company’s toll-free number 1800 266 0101 or send a mail to claims@turtlemint.com.

Documents required for death claims

For your death claims to be settled, the following documents would have to be submitted along with the claim form –

• Death certificate
• Policy bond
• Identity proof and bank account details of the claimant
• Police FIR, post-mortem report and other documents associated with an accidental death

A term insurance policy is a must for protecting yourself and your family against unforeseen misfortunes. So, understand the nitty-gritty of the plan and invest in one for financial security.