Term insurance is pure life cover and nothing else. You pay a premium for a defined term, and if you die during that term your nominee receives the sum assured. If you survive the term, you get nothing back. That absence of a maturity payout is not a defect. It is the reason the cover is so cheap.
Its only job is to replace your income for the people who depend on it. Judged on that job, nothing else in the Indian market comes close on value.
Why it costs so little
An endowment or money-back policy bundles a small amount of cover with a savings component. Most of your premium goes into the savings part, which typically returns somewhere in the region of 4% to 6% and locks you in for decades. The cover that results is usually a fraction of what your family would actually need.
Term insurance strips the savings out. A healthy 30 year old non-smoker can often secure Rs 1 crore of cover for roughly Rs 10,000 to Rs 15,000 a year, depending on insurer, term and health. Getting Rs 1 crore of cover through an endowment policy would cost many times that.
| Term plan | Endowment or ULIP | |
|---|---|---|
| Typical cover for Rs 15,000 a year | Around Rs 1 crore | Often under Rs 5 lakh |
| Maturity payout | None | Yes |
| Return on the savings part | Not applicable | Historically modest |
| Flexibility | High | Low, heavy surrender penalties |
The principle almost every independent adviser repeats: keep insurance and investment separate. Buy cheap term cover for protection, and invest the difference in a mutual fund, PPF or index fund where you can see and control what it earns.
How much cover you need
The common rule of thumb is 10 to 15 times your annual income. It is a starting point, not an answer.
A more careful method adds up:
- The income your dependants would need, multiplied by the years they would need it
- All outstanding liabilities, especially a home loan, so the family is not forced to sell the house
- Specific future costs such as children's education and marriage
- Then subtracts existing assets and any employer-provided cover
Someone earning Rs 12 lakh a year with a Rs 40 lakh home loan and two young children may need considerably more than Rs 1.2 crore.
Do not rely on employer group cover as your main protection. It usually ends the day you leave the job, and it is typically a small multiple of salary.
Buy it early
Premiums are locked at the age and health at which you buy, and they stay level for the whole term. The same Rs 1 crore cover bought at 25 costs materially less each year than at 35, and that difference is paid every year for decades.
Health also matters. Once a condition such as diabetes or hypertension is on record, premiums rise or exclusions appear. Buying while healthy is one of the few decisions in personal finance where waiting has no upside at all.
Disclosure is the thing that actually matters
The most common reason an Indian term insurance claim is rejected is non-disclosure. Smoking, alcohol consumption, existing medical conditions, family medical history, income, and any other policies you hold must all be declared truthfully.
Understating smoking to get a cheaper premium is a false statement that can void the entire claim at exactly the moment your family needs it. The premium difference is small. The consequence of hiding it is total.
Insurers must generally settle honestly disclosed claims, and Section 45 of the Insurance Act limits an insurer's ability to challenge a policy after three years. That protection depends on having disclosed properly in the first place.
Riders and variants worth understanding
- Critical illness rider: pays a lump sum on diagnosis of specified conditions. Often useful, but compare against a standalone health or critical illness policy.
- Accidental death benefit: increases the payout if death is accidental. Cheap, and of limited value if your base cover is already adequate.
- Waiver of premium: future premiums are waived on disability. Usually worth having.
- Return of premium plans: give your premiums back if you survive. They cost substantially more, and the implied return on that extra premium is poor. Buying a plain term plan and investing the difference is almost always better.
Practical points
- Name a nominee and keep it updated. Under the MWP Act, a policy taken for the benefit of wife and children is protected from creditors, which is worth knowing if you have business liabilities.
- Tell your family the policy exists. A large number of Indian policies go unclaimed simply because nobody knew.
- Check the claim settlement ratio and the amount settlement ratio of the insurer, published annually by IRDAI.
- Premiums qualify under [Section 80C](/glossary/section-80c) under the old regime, though tax saving is a reason to buy the right cover, never a reason to buy the wrong product.
Term insurance protects income. An emergency fund protects against smaller shocks. Health insurance protects against medical bills. All three do different jobs, and none substitutes for another.