Term Insurance Explained: Cover, Eligibility, Exclusions and How Much You Need

Term insurance is one of the simplest types of life insurance plans. With term insurance, you can protect your family financially if you pass away during the policy term. Term insurance plans do not offer savings/investment opportunities like some other insurance plans. With a pure term insurance plan, there is only one thing it offers: it replaces your income if you were to die.

Here’s how it works, what it covers and what you should consider before buying one.

What Is Term Insurance?

“A term insurance policy offers protection for a specific period of time. You pay a certain premium at regular intervals and in case of the death of the policyholder within the policy term, the nominee is entitled to receive the sum assured, as per the terms, conditions of the policy,” says Venkatesh Naidu, CEO at BajajCapital Insurance Broking Ltd.

If the policyholder survives the policy term, a standard pure term plan generally does not pay a maturity benefit.

This makes term insurance different from savings or investment-oriented insurance products. Its purpose is protection, not wealth creation.

“Term insurance should be looked at as an income protection tool. The objective is to ensure that the financial responsibilities a person is currently meeting - whether it is household expenses, loans or a child’s education - do not become a burden on the family in their absence,” says Naidu.

Why Do You Need Term Insurance?

The need for term insurance largely depends on whether someone is financially dependent on your income. When your income is used for running your household expenses, EMIs, children’ education, parents or other financial dependents, your loved ones could be deprived of that financial security if something were to happen to your income stream.

You should consider term insurance if:

• You have dependents

• You have unpaid loans

• You have planned for children’s education

• You have long term financial obligations

How Much Cover You Should Get?

There is no magic number that fits all.

While 15–20 times your annual income is a good thumb rule, don’t let your income alone decide your cover amount.

Things you may also want to consider:

• Outstanding mortgage, personal or other debt.

• Any dependant family members.

• Existing investments and savings.

• Your household’s current spending.

• Children’s education and other long-term financial objectives.

• The expected duration your family will need financial support.

Say, a person earns Rs 10 lakh every year. He can opt for a term insurance cover of Rs 1.5 - 2 crore as per the income based rule. However, his insurance needs can be higher or lower than this based on his liabilities, number of dependants and existing assets. Always aim for a payout that can take care of your family’s financial requirements, instead of just going for the lowest premium.

What Does A Term Insurance Plan Cover?

If the policyholder dies during the term of the policy, a term insurance plan pays the death benefit, subject to terms, conditions and exclusions of the policy. Death due to illness, natural cause, and accident are covered.

However, there can be specific exclusions like suicide during the specified initial period, nondisclosure or misrepresentation of important information and underwriting criteria such as participating in hazardous activities etc. while availing the policy. The exact list of exclusions will be mentioned in your policy document. This is why it’s important to read your policy before purchasing.