What Is Term Insurance, Really?

Term insurance is a pure life insurance product. You pay a fixed premium every year. In return, the insurer promises to pay a large lump sum — called the sum assured — to your family (nominee) if you pass away during the policy period. That’s it. No investment angle, no maturity bonus, no complications.

Think of it like this: you’re renting a financial safety net for your family for the next 20–40 years. If nothing happens to you, the net goes away. If something does happen, your family has the money they need to rebuild their life — pay off the home loan, fund the kids’ education, handle daily expenses — without scrambling.

Standard term plans do not pay anything if you survive the policy term. Before that confuses you — that’s actually the whole point. Because there’s no “return” to manage, the premium stays extremely low. You’re not investing; you’re protecting.

There is, however, a variant called Term with Return of Premium (TROP) where you get your total paid premiums back if you outlive the policy. It sounds appealing, but the premium is significantly higher. Financial advisors generally recommend the plain term plan and investing the difference in mutual funds — but we’ll get to that.

How Does Term Insurance Work?

The process is simpler than filling a government form (which is saying something). Here’s how it unfolds:

Step 1 — Fill the proposal form: You share your age, income, health history, lifestyle habits (smoker or not), and occupation. Be honest here. Any false information can lead to claim rejection later — and that’s the worst time to find out you made a mistake.

Step 2 — Choose your coverage: Decide the sum assured (how much your family gets if you die) and the policy term (how many years the cover lasts). Most experts suggest covering at least 10–15 times your annual income.

Step 3 — Get a premium quote: Based on your profile, the insurer tells you exactly what you’ll pay per year. The younger and healthier you are, the lower the number.

Step 4 — Medical tests (if required): For high coverage amounts, insurers may ask for a basic health check-up. This is standard practice and nothing to worry about.

Step 5 — Policy issuance & payment: Once everything clears, you start paying premiums. The policy is active from that point. Miss a payment? There’s a grace period — typically 30 days — before the policy lapses.

Term Insurance vs Other Life Insurance Plans

Indians are famously over-sold on endowment plans and money-back policies that promise “insurance + savings in one.” Let’s look at how they actually compare:

The short version: if protection is your goal, term insurance wins hands down. Many financial planners recommend “buy term + invest the rest” — meaning get a cheap term plan, then invest the saved premium amount in mutual funds or PPF for wealth creation.

Types of Term Insurance Plans in India

Not all term plans are identical. Once you understand the types, picking the right one becomes easier.

1. Pure Level Term Plan

The most common type. Your sum assured stays fixed throughout the policy. If you opt for ₹1 crore today, your family gets ₹1 crore even 30 years later. Simple, affordable, and widely recommended.

2. Term with Return of Premium (TROP)

You get back every rupee of premium paid if you survive the term. Sounds great — but the premium can be 2–3x higher than a plain plan. The math rarely works in your favour versus investing that extra amount separately.

3. Increasing Term Plan

The sum assured grows by a fixed percentage every year to beat inflation. Useful if you’re worried that ₹1 crore today won’t mean much in 20 years (it won’t buy the same things, that’s for sure). Premiums are slightly higher.

4. Group Term Insurance

Offered by employers as part of the benefits package. Covers all employees under a single master policy. Premiums are low (or borne by the company), but coverage is usually modest and ends when you leave the job. Don’t rely on this as your only cover.

Tax Benefits of Term Insurance

Term insurance comes with real tax savings — not hypothetical ones. Here’s what you can claim under the Income Tax Act, 1961:

So in a very real sense, the government helps you pay for your family’s protection. A person in the 30% tax bracket paying ₹15,000 as annual premium effectively saves ₹4,500 in taxes — making the net cost even lower.

Riders That Boost Your Term Cover

Riders are add-ons you can attach to your base term plan for a small extra premium. They’re worth knowing about because they can make a big difference in specific situations.

Accidental Death Benefit Rider: If death occurs in an accident, your nominee gets an additional payout over and above the base sum assured. Essentially, double the cover for accident cases.

Critical Illness Rider: Pays a lump sum on diagnosis of serious illnesses like cancer, heart attack, or stroke — even while you’re still alive. This money can cover treatment costs without draining your savings.

Waiver of Premium Rider: If you become permanently disabled or critically ill and can’t earn, future premiums are waived — but your cover stays active. This one is genuinely useful and available free or at minimal cost in many plans.

Terminal Illness Rider: You receive the full sum assured upon diagnosis of a terminal illness, so you can make financial arrangements for your family while you still can.

How Much Term Insurance Cover Do You Actually Need?

The usual rule of thumb: aim for 10–15 times your annual income as the sum assured. But let’s be a bit more thoughtful about it.

Factor in your outstanding home loan, car loan, and any other debts. Add the amount your family needs for living expenses for at least 10 years. Then add goals you’d want funded — your child’s college education, a daughter’s wedding, your spouse’s retirement security. Subtract any existing investments and assets. What’s left is roughly your required cover.

For most middle-class Indian families where the primary earner makes ₹10–20 lakh per year, a cover of ₹1–2 crore is a reasonable starting point. The good news: this is very affordable with term insurance.

7 Smart Tips Before You Buy

Who Should Buy Term Insurance?

The short answer: anyone with financial dependants. That includes young professionals who just started earning, newly married couples, parents of young children, people with home loans or other significant debts, and even self-employed individuals whose income is less predictable.

If no one financially depends on you — you’re single, no loans, parents are financially independent — then term insurance may not be urgent right now. But the moment you have someone counting on your income, it becomes a necessity, not a luxury.

Women with income and family responsibilities should absolutely consider term insurance independently. Many insurers offer slightly lower premiums for women due to statistically lower mortality rates.

Frequently Asked Questions

The Bottom Line

Term insurance is not a product you buy and feel excited about — it’s something you buy so you never have to think about your family’s financial survival again. It’s the most responsible, lowest-cost way to replace your income in the worst scenario.

India’s insurance penetration is still at just 3.7% of GDP — well below the global average of 7% according to IRDAI data. Most Indian families remain dangerously underinsured. If you’re still relying on your company’s group cover or no cover at all, this is worth fixing soon.

The younger and healthier you are today, the cheaper your premium. And if something does go wrong — your family gets to keep their home, educate the kids, and stand on their own two feet without falling apart. That’s worth every rupee of that ₹15-a-day premium.