How does Term Insurance work?

A simple guide to understanding Term Life Insurance

According to the Insurance Regulatory and Development Authority of India (IRDAI), only 2.74% of Indians currently have life insurance coverage¹. This shows that most people in India lack proper financial protection, often because they aren’t fully aware of how term insurance works or why it’s important. However, if your family depends on your income, it is crucial to secure their financial future with the right protection. Term life insurance is a simple and affordable way to ensure your family stays financially protected even in your absence.

 

What is Term Insurance?

Term insurance is a life insurance policy that provides coverage for a fixed period in exchange for regular premiums. If the policyholder passes away during this period, the insurer pays a guaranteed amount to the nominee to help cover financial losses. Term plans are affordable as they cover only the risk of death without any investment component, offering a cost-effective way to secure your family’s finances.

 

What is Policy Term?

Policy Term is the specific period during which your life insurance coverage is active. If the insured person passes away within this tenure, the insurer pays the death benefit to the nominee. The term length is chosen based on your financial needs.

 

How does a Term Life Insurance policy work?

 

• Individual chooses a policy

  Individual reviews the policy, fills out the application, selects the coverage period, sum assured and undergoes medical tests, as required by the insurer.

• Insurer decides the premium

  Insurer evaluates the policyholder’s risk based on age, health, lifestyle and habits like smoking and determines the premium amount.

• Premium payment starts

  Once the policy is approved, the policyholder needs to pay the premiums - monthly, quarterly, half-yearly or annually, as per their convenience. The policy remains active as long as the premiums are paid.

• Coverage period begins

  From day one of the policy term, you’re covered. If you pass away during this period, the insurer pays the full sum assured to your nominee.

• Get back premium on policy survival

  You can opt for a term plan with return of premium² to get back all your premiums paid if you outlive the policy term.

How to buy a term insurance policy?

After understanding what is term insurance, let’s go through the steps to buy it:

 

Step 1: Understand the policy

A term life insurance policy is an agreement between you and the insurance company. You pay a fixed amount (premium) for a set time. The person covered is called ‘life assured’. If the life assured dies during this time, the insurer pays money to the nominee.

 

Step 2: Fill the proposal form

When applying, you must share the required personal and financial details, such as:

• Medical history and current health
• Lifestyle habits (e.g., smoking, alcohol use)
• Age and income
• Profession

These details help the insurer assess the risk and calculate your premium. Factors like older age, smoking, high-risk hobbies, or chronic illness may increase your premium.

 

A medical test may also be conducted, if deemed necessary by the insurer. It may be tele-medical, video medical or physical medicals.

 

Step 3: Decide policy details

Before buying the plan, you need to make a few important decisions:

• Life cover amount: Should be enough to support your family’s expenses, debts, and future needs.

• Policy term: Choose how long you want the coverage, such as until your children are financially independent or your retirement.

• Premium payment mode: You may pay once, regularly over the term, or for a limited period.

• Payout option: Choose between a lump-sum payment, staggered payments, or a combination, depending on what suits your family.

• Add-on riders⁴: You may add benefits like accidental death or critical illness cover for a small extra cost.

 

Step 4: Reviewing the premium quote

Once you've filled out the form, the insurer will evaluate your details and provide a premium quote. If you agree and make the payment, your policy becomes active.

 

Step 5: Manage changing needs

Some term plans allow you to increase your coverage over time. For example, you may be able to add more cover after marriage, childbirth, or as your financial responsibilities grow. This helps your policy keep up with inflation and life changes.

 

Step 6: Appoint a nominee

You must appoint a nominee, usually a close family member, who will receive the policy benefits if you pass away during the policy term.

 

Useful features of Term Insurance Plans

Term insurance plans come with several practical features that make them a smart financial choice.

 

• Low-cost premiums

  Term insurance offers high coverage at affordable premiums. Since it only covers the risk of death and doesn’t include any investment component, it's one of the most cost-effective ways to secure your family’s financial future.

 

• Flexible policy terms

  You can choose the duration of the policy based on your financial responsibilities, whether it's until your children become financially independent or until your retirement. This flexibility helps you align the plan with your life goals.

 

• Customisation Options

  Term insurance plans offer flexibility to suit individual needs. You may choose from various policy terms, premium payment modes, payout options, and add-on riders³ based on your financial goals.

 

Advantages of Term Insurance

Here are some key benefits of term insurance:

 

1. Affordable premiums with high coverage

Term insurance provides life coverage for a fixed period at a low cost. It offers a large sum assured that may help replace several years of lost income.

 

2. Support in case of disability

Some term insurance plans include disability benefits. If you become totally and permanently disabled due to an accident during the policy term, the insurer will pay your remaining premiums.

 

3. Protection against critical illnesses

Certain plans offer additional coverage for critical illnesses. If you are diagnosed with a covered serious illness during the policy term, the insurer will pay a lump sum to help with treatment costs.

 

What happens at maturity?

Traditional term plans do not offer any maturity benefits, this means if the policyholder survives the term, no amount is paid out. However, you may choose policies with Term plans with Return of Premium (TROP²) or add it as a rider⁴ to obtain a maturity benefit. With these plans, if the policyholder survives the policy tenure, the insurer returns the total premiums paid.

 

Term Insurance plans from Tata AIA

Tata AIA Life Insurance has an Individual Death Claim Settlement Ratio (CSR) of 99.14% for the financial year 2024-25. This reflects the company’s commitment to timely claim settlements when your family needs it most.

 

Tata AIA offers the following term plans:

 

1. Tata AIA Maha Raksha Supreme

 

• Includes an accelerated payout benefit that provides 50% of the base life cover in case of terminal illness.

• Allows you to increase coverage as your insurance needs change, without requiring new medical tests.

• Life cover starts from ₹2 Crore

Tata AIA Maha Raksha Supreme Select - Non-Linked, Non-Participating, Pure Risk, Individual Life Insurance Product (UIN: 110N171V12)

 

2. Tata AIA Sampoorna Raksha Promise

 

• Offers financial protection for your family with flexible premium payment options.

• Policyholders can choose to receive their death benefit as a lump sum or in instalments

• Life cover starts from ₹50 Lakh

Tata AIA Sampoorna Raksha Promise - Non-Linked, Non-Participating, Pure Risk, Individual Life Insurance Product (UIN:110N176V07)

 

3. Tata AIA Saral Jeevan Bima

 

• Get comprehensive cover for your family

• Tax³ benefits on premiums paid

The complete name of Tata AIA Saral Jeevan Bima is Tata AIA Life Insurance Saral Jeevan Bima - A Non-Linked Non-Participating Individual Pure Risk Premium Life Insurance Plan (UIN: 110N157V02)

 

4. Tata AIA Bharat Suraksha Cover Micro Insurance

 

• Simple and affordable protection plan

• Flexibility to choose your Policy Term and Premium Payment Term

Tata AIA Bharat Suraksha Cover Micro Insurance Plan - Non-linked, Non-Participating Individual Micro Term Insurance Plan (UIN: 110N169V01)

 

Conclusion

Securing your loved ones through term life insurance offers peace of mind. It provides you coverage for the chosen period. Moreover, the nominee gets an assured amount in case you pass away when the policy is still active. Understanding how term insurance works in India is essential to make informed decisions. This helps you to effectively compare different policies, their conditions, exclusions and choose a plan that provides suitable benefits at affordable premiums, ensuring your family’s financial protection.