Understanding How Term Life Insurance Policy Works

The Insurance Regulatory Development Authority of India’s (IRDAI) December 2019 annual report reveals a meagre 2.74% life insurance penetration in India. 


Indians are underinsured because of limited awareness about life insurance benefits and how such plans work. But if your loved ones’ livelihood depends upon your income, you need to safeguard their financial security in your absence. And term life insurance is one of the best instruments to ensure your family never lacks financial resources. 


Hence, you need to understand what is meant by term insurance and how it works. 


What is term insurance?


Term insurance is pure protection life insurance policy. It provides coverage for a defined period in exchange for a specified premium amount. 


In case of an unfortunate event during this time-frame, the insurer provides a guaranteed# payout. It compensates your nominee for the loss of your income. 


Affordability is a characteristic feature of term plans. Such plans do not include any investment component. The entire premium covers the mortality risk. Hence, term insurance provides sizable coverage at pocket-friendly rates. Thus, regardless of your budget, term insurance can cover your dependents’ financial necessities after an eventuality.


What is a term life insurance policy?


Your policy is the contract between you and the insurance provider in which you pledge to pay the required premium and the insurer provides the benefits in case of a valid life claim from your beneficiary. 


What is the policy term?


The policy term is the duration of your life cover. If an untoward incident occurs within this period, your insurer pays the policy benefit to your nominee. You can choose your term plan’s policy tenure as per your insurance needs.


How does a term life insurance policy work?


1. The agreement


A life insurance policy, including a term life insurance plan, is a legal agreement between you and the insurance company.You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured.


You, the person who pays for the coverage, are the policyholder. You can buy the coverage for yourself or another family member. The person whose life is insured is the life assured.


As the owner, you have to pay the insurer a pre-decided premium. The insurer pays a fixed death benefit to your nominee if a contingency occurs while the policy is in force.


2. Filling out the proposal form 


You need to disclose the following information in the term plan application form:

  • medical history
  • current health conditions
  • lifestyle habits
  • hobbies
  • age
  • annual income
  • nature of your profession


Based on such data, the insurer assesses the probability of your family raising a life claim. Factors that can elevate the premium amount include:


  • A higher age
  • Unhealthy habits like smoking
  • Risk-prone hobbies like skydiving
  • Hazardous professions
  • Chronic health problems 


3. Assessing your requirements


  • Decide your life cover: Your coverage should be enough to meet your dependents’ current living expenses and future needs. Children’s college fees, marriage, spouses’ old-age needs, and pending liabilities are some of the factors to consider.
  • Choose your policy term: Work out the duration for which your loved ones will need financial support. It can be the time left until your children complete college or your retirement.
  • Pick a premium payment mode: Term plans permit one-time payment of the entire premium. Or you can go for regular payments throughout the policy period or for a limited time-frame.
  • Select the payout option:  With a lump-sum payout, after repaying outstanding debts, your family can invest the rest. The returns can fund their living costs. However, if your family lacks financial know-how, you can opt for a combination of a lump-sum and a staggered payout. It ensures your loved ones never run out of funds.  
  • Look into riders1You can increase your base coverage with riders1 for a negligible rise in the premium. Such add-ons provide extra payouts, covering contingencies, such as deaths due to accidents.


4. Reviewing the premium quote


Based on your details, the insurer provides a premium quotation. When you make the payment, you get the coverage.


5. Covering increased insurance needs


Increasing term plans enhance your coverage at defined intervals, overcoming inflation. Some term plans also allow you to add to your life cover at your life’s milestones when your obligations increase.


6. Assigning a nominee 


You need to name the person who will receive your term plan’s monetary benefits. It should be an immediate family member who will take care of your dependents.


What happens at maturity?


Traditional term plans offer no maturity benefits. But some progressive term plans, known as Term plans with Return of Premium (TROP2), now return the premium paid if the policyholder survives the policy tenure. 


Early surrender


Limited pay and one-time premium payment plans refund a part of your investment if you withdraw your policy before the termination date.


Term Insurance Plan from Tata AIA


Tata AIA Life Insurance’s hallmark is its Claim Settlement Ratio (CSR), reported as 99.06%3 for the FY 2019-20. This CSR assures timely claim settlements in your family’s hours of need.  


Tata AIA offers the following term plans under its Protection Plans segment:


  • Tata AIA Maha Raksha Supreme (UIN: 110N102V03)
    • In-built benefit accelerated payout benefit providing 50% of the base life cover in case of a terminal illness.
    • Option to increase coverage with changing insurance needs, without fresh medical underwriting.
  •  Tata AIA Sampoorna Raksha (UIN: 110N129V05)
    • Financial protection of your family with flexible premium payment term
  • Tata AIA Sampoorna Raksha+ (UIN:110N130V05)
    • Return of premium at maturity to celebrate the policyholder’s survival after the policy period.
    • Payout options to suit your family’s needs – Lump-sum or monthly income.
  • Tata AIA iRaksha TROP (UIN: 110N106V02)
    • It addresses consumers’ concern about not getting any returns from their expenditure on term plans when they survive after the policy term.
    • At maturity, this plan returns the premiums you paid.


Useful features of all the above Protection Plans include: 


  • Special premium rates for women and individuals with healthy lifestyles
  • Riders1 at nominal extra prices


Final words


Securing your loved ones against exigencies provides unmatched peace of mind. You can use a term life insurance plan to secure your family’s financial wellbeing. But to make the best use of this financial product, you need clarity on how term plans work. Then you can compare various schemes and understand the different conditions and exclusions. You can then select the one offering the maximum benefits at the lowest premiums.



Need help to choose the right plan?


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# Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry


1 Rider is not mandatory and is available for a nominal extra cost. For more details on benefits, premiums and exclusions under the Rider, please contact Tata AIA Life's Insurance Advisor/ branch


2 Return of all the premiums paid (excluding rider premium, extra premium and taxes) in case the policyholder survives till maturity 


3Individual Life Claim Settlement Ratio is 99.06% for the FY2019-20 as per the Latest Annual Audited Figures


  • Insurance cover is available under the products.

  • For more details on risk factors, terms and conditions please read the Sales Brochure carefully before concluding a sale.

  • The products are underwritten by Tata AIA Life Insurance Company Limited. The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.in

  • This document is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. This document is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this document is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.