Life is uncertain, and one can never foretell what the future holds for us. We cannot be certain about anything in life, whether we will be successful, get married, or have kids, but there is just one thing that is guaranteed: Death. 

We cannot change this uncertainty. However, we can plan to die well in the same manner as we keep planning to live well all our lives. The most crucial factor towards achieving this objective is ensuring your family is financially secure even after you are gone. 

While most of the products in our investment basket are directed toward the objective of wealth creation, Life Insurance has a much broader purpose. It is financial support to the family in the unfortunate event of the breadwinner's demise. Term Insurance is the most fundamental kind of life insurance. 

Term insurance is a type of life insurance policy that provides coverage for a specified duration known as the “Term” of the policy. It offers financial protection to the policyholder's beneficiaries in the event of the policyholder's death during the term.

Unlike other types of life insurance, such as whole life or endowment policies, term insurance does not accumulate cash value over time. Instead, it focuses solely on providing a death benefit to the beneficiaries. 

Term insurance policies are typically more affordable compared to permanent life insurance options, making them an attractive choice for individuals seeking cost-effective coverage for a specific period, such as during their working years or mortgage repayment period.

The Contract

An Insurance Plan is a legal contract between you and the insurance company. 

The policyholder agrees to pay a certain amount to the insurance company, known as the Premium. 

In return, the insurance company agrees to pay a specific sum of money, called a Death Benefit, to the beneficiary in case of death of the Life assured during the term of the policy. 

The person who pays the premium for the coverage is the Policyholder. A policyholder can buy coverage for themselves or any family member. 

The person who is covered by the insurance is the Life Assured.  

The Application Process

To buy term insurance, you need to fill out an application form declaring your information like medical history, current health conditions, lifestyle habits, hobbies, age, annual income, and nature of your profession, apart from the basic personal details. This helps the insurer assess your risk level and arrive at the premium accordingly. 

The major factors that affect premium include age, lifestyle habits like smoking, drinking, health issues, hazardous professions and similar factors. 

Assessing your Requirements

• Assess the Cover Required: Decide the Life Cover that would be sufficient to take care of your family's needs in your absence. Check out the methods discussed further to do the same. 

• Choose the Policy Term: Choose a policy Term depending on the duration you feel your family would need the coverage. It's usually until the children become educated and employed or till your retirement. 

• Choose the Premium Payment Mode: You can go for single premium payment or Regular Payments. Under Regular payments, too, there is the option of annual, quarterly, or monthly premium payments. 

• Choose the Payout Option: You can choose a Lump Sum payout wherein your family would take care of the bulk financial requirements and invest the rest. However, if you are not sure they would be able to take care of the same, you can choose to optimise in the form of staggered or regular payouts that will ensure your family is paid regularly for their financial requirements. 

• Check Out the Riders: You can always improve your policy with increased coverage and for various other situations by adding up Riders in your base plan. 

Assigning a Nominee

Affordable

Tax Benefit

Riders

Death Benefit

Multiple Options of Death Benefit Pay-out

In  the cases of untimely demise of the life assured, the nominee has the option to receive the death benefit in the form of a monthly or a lump sum payout depending on the requirement. 

For example, there may be monthly EMIs for a home loan, car loan, or monthly payouts like fees. To meet such monthly recurring expenses, a monthly payout might be chosen. 

However, there might also be a case when, at the time of the mishap, a life assured's child was ready to go for higher education. The nominee may take the death benefit as a lump sum payout in such a case.

1. Basic Term Plan

2. Return of Premium Term Plan

3. Term Insurance With Limited Premium Payment Term

4. Term Insurance With Increasing Sum Assured

A rider can be an extension to your base plan, with an additional premium that provides additional coverage for various situations.

Some of the Major Riders in Term Insurance are listed below:

Accidental Death Benefit Rider

Accidental Death Rider provides extra coverage to the dependents in case of accidental death of the life assured. This is over and above the basic coverage the insurer already provides in the base plan.

In fatal accidents, the medical interventions that go into saving the victim's life hit the family's finances. In many cases, the victim eventually dies, and the family then deals with the personal loss in addition to this financial loss. 

To cover these scenarios, in cases where the life assured does not immediately pass away after an accident, the Accidental Death Benefit rider provides the Sum assured to the nominee within 120-180 days from the date of the accident. Hence, Accidental Death Benefit is one of the most significant Riders that must be added to the basic insurance policy.

Critical Illness Rider

A Critical Illness Rider provides financial coverage in case the life assured is diagnosed with any critical illnesses as mentioned in their policy document. For example, cancer, heart ailments, and tumours are some critical illnesses. 

The Critical Illness Benefit is provided to the life insured to meet the treatment as well as household expenses in those times of need. It acts as an Income Replacement plan and ensures that the treatment of the policyholder, as well as the finances of the family, are not hit because of the illness.

Accidental Total and Permanent Disability Benefit Rider

This rider takes care of the finances in case the life assured suffers an accidental partial or permanent disability and, thus, becomes unfit to carry on with any occupation.

For example, loss of both eyes and legs, both arms or one arm and a leg, can be classified as a permanent disability. Such kind of disabilities leaves a person incapable of leading a normal life where they can take up a job and earn for their family. 

In such cases, the policyholder is paid a specific portion of the Sum Assured regularly for a few years, which takes care of the finances for the most challenging years of the family.

Waiver of Premium Rider

This rider ensures that the policy stays active even when the policyholder cannot pay premiums due to physical disability.

With this rider, the premiums are waived, and the policy continues till maturity. On maturity, the benefits are paid to the nominee.

This rider can be availed in cases where:

• The life insured has been disabled for six months or more.

• When life insured is diagnosed with any of the critical life-threatening ailments

Terminal Illness Rider

Also known as Accelerated Death Benefit Rider, this rider ensures the Sum Assured is paid to the policyholder on the diagnosis of any terminal illness.

Terminal Illnesses are ailments with a high likelihood of death within six months. In these types of illnesses, in addition to the eventual personal loss of the family member, the finances are also hit badly during the treatment.

A Terminal Illness Rider provides much-needed financial freedom in those times of need to put finances in order, take care of medical support, or travel. This rider comes into effect only after the diagnosis and short life expectancy confirmation.

Income Benefit Rider

Life is full of uncertainties, but it's up to us to plan well for all those lemons that life might throw at us. When you buy insurance, you have taken an essential step towards securing your family's future. Besides, there is always scope for better planning.

Under usual circumstances, insurance pays off the death benefit as a lump sum in case of the policyholder's demise. 

However, with Income Benefit Rider, if the policyholder dies during the policy term, the family receives a certain monthly payout with which they can manage their finances better. It acts as a substitute for monthly income in the absence of the policyholder so that the family doesn't struggle to pay bills.

The most significant benefit of Term Insurance is its financial stability to the dependents in case of the policyholder's unfortunate demise. 

Hence, any individual who has financial dependents: spouse, parents, retirees with liabilities, or business people with financial liabilities, must definitely invest in a Term Insurance Plan.

Young Professionals - The Younger You Are, The Lesser Is Your Premium

Young, freshly employed individuals usually think they don't need Term Insurance since they don't have any dependents. However, this thought might not be correct. At a young age, with a healthy body and no liabilities, your premium would be much lesser than it becomes in the later stages of life. And it remains the same for the complete term.

Read more: Term Insurance For Young Professionals

Newlyweds - Gift Your Partner the Ultimate Security of Insurance

Post-marriage, we start a new life and build a new lifestyle. We don't have just an emotional dependency on each other, but there is a financial dependency too.

So, while we are still lost in the roses and chocolates, do take time to purchase a gift that will secure your partner's future life. Buy a term plan.

Read more: Term Insurance For Family

Taxpayers - Who Doesn't Like an Extra Penny Saved From Tax

Home Loan Borrowers - Because Its About Your Dream Abode

Many people keep procrastinating on this critical life step and believe that the right time to buy term insurance is in the post-30s when you start settling with the family. However, that is not true.

Most experts believe that the earlier you start, the better it is. At a young age, when you have fewer liabilities and are less prone to any diseases, your premium is considerably lesser than in the later years. It remains the same for the complete tenure of your policy.

1. Provide Financial Security to Your Family

2. Secure Your Lifestyle

With a progressing lifestyle, your assets progress, and you end up buying a house, car, etc. But with all that, your liabilities also increase if these are on loan. In the event of an untimely death of the primary earner, the burden of these liabilities falls on the dependents. 

In many cases, these assets need to be given up by the family because they can't bear the burden. Insurance is a must-buy to avoid these situations and secure assets.

3. Secure Your Finances Against Critical Illnesses

In the case of the unfortunate demise of the family's breadwinner, the insurance proceeds must be sufficient to take care of the complete financial liabilities of the family. Even in the absence of the policyholder, the family's lifestyle must stay safe. 

Children's education, marriage, pending liabilities, spouse needs and regular expenses are some significant factors to consider while deciding the coverage requirement. This is the basic premise behind determining how much term insurance a person needs.

Here are a few methods that consider these factors and help you determine an indicative figure for your Term Insurance coverage requirement:

1. Expense Replacement

A method commonly suggested by most financial planners, the Expense Replacement method takes into account all the expenses of an individual, like day-to-day expenses, future expenses like children's education, marriage, financial requirements of dependents like spouses, parents, siblings, etc., loans and debts.

After arriving at this expenditure figure, we deduct the present value of our savings, like investments and any other life cover. Here, we do not consider assets like homes and cars in the calculation since we want our family to use them as utility and not depend on their monetary value.

This final figure gives us an idea of the insurance coverage amount required by a person.

2. Income Replacement

This method is based on the premise that the insurance proceeds must be sufficient enough to replace the lost earnings of the deceased breadwinner of the family. So, by this method,

Insurance Cover = Current Annual Income x Number of Years left for Retirement

It's a simple method that gives you a close idea of the required sum assured, but a significant drawback is that it does not factor in the inflation, income rise, and the major expenses on the way.

3. Human Life Value

To find how much insurance someone needs, the major factor widely used across the insurance industry is the Human Life Value or HLV. HLV, in simple terms, is the monetary value attached to a person.

It is the present value of all future income a person would expect to earn for their family. It directly indicates the financial loss a family would suffer in case of the untimely death of the family's breadwinner.

4. Underwriter's Rule

A common thumb rule for calculating the minimum amount of cover needed by a person, the Underwriter's rule states that the sum Assured = 10 x Annual Income. So, if your annual income is 10 lacs, you should have a life cover of 10 x 10 = 1 crore, i.e., 10 times the annual income.

While this formula has become widely prevalent due to easy calculation, it is believed to give a minimum figure as an indicator for the required sum assured.

When you buy a Term Insurance plan, your premium is calculated based on several demographic and lifestyle factors like age, gender, present or past medical ailments, habits like smoking or drinking, hereditary diseases, and several other factors.

Here are the most common factors that affect a Term Insurance premium:

• Age: Age is a primary factor affecting your Term Insurance premium. It's accepted that the younger we are, the fewer the risks of developing any critical medical condition that might result in any unfortunate event. This risk increases with age; hence, the insurance provider's financial risk also increases, directly affecting the premium.

• Term: The Term Insurance premium directly depends on the period and increases with the increasing term, considering the older and the riskier years of life.

• Medical History: Medical History is also one of the significant factors affecting Health Insurance premiums since a higher risk to life can mean higher chances of claims to the company. The family medical history is also analysed since there are many diseases like stroke, diabetes, and cancer that can be passed down to the next generation.

• Current Health Condition: Term Insurance usually involves a medical checkup before you can buy the policy. This is done to check if the prospective policyholder does not suffer from any ailment like hypertension, diabetes, or any health condition that poses a life risk and thus increases the policy's premium.

• Occupation: Your premium is also affected by your profession. People in risky professions, like soldiers, pilots, and people working in the mining industry, are directly exposed to chemicals or other hazardous activities and are more exposed to risk and thus charged higher premiums.

• BMI: A skewed BMI index can directly mean that you are at a health risk, increasing your premium.

• Lifestyle Habits: A non-smoker who also doesn't consume alcohol has a lower premium than one who does. Also, if you are inclined towards adventure activities like scuba diving, skydiving, etc., your premium would be higher since these activities put life at risk.

When we choose a Term Insurance for ourselves, various factors are considered. While HLV and other analyses help us arrive at the sum Insured that might be sufficient for us and the riders needed, if any, many other factors vary across insurance providers. They must be considered before zeroing in on a Term Insurance policy.

• Claim Settlement Ratio Of the Insurer: The most crucial factor when selecting Term Insurance is the Claim Settlement Ratio of the Insurer. A claim settlement ratio means the number of claims that have been settled against the number of claims made to the insurance company. When deciding on a term plan, you should always look for a high claim settlement ratio.

• Additional Covers Available: Check the riders available with the insurance provider. Most insurance providers offer critical illness, accidental death, or terminal illness riders.

• Solvency Ratio: The Solvency Ratio gives an idea of whether your insurance provider has enough financial buffer to settle all claims in case of any extreme situation.

• Policyholder: PolicyHolder is the person who buys the insurance and pays regular premiums.

• Life Assured: The person whose life is insured. This may or may not be the same person as the policyholder.

• Nominee: The person who receives the death benefit or sum assured in case of an unfortunate demise of the policyholder. The policyholder chooses the nominee when taking the policy; however, they can always be changed during the policy term.

• Sum Assured: This is the amount of money a nominee receives in case of the policyholder's demise, and it is one of the major factors determining a policy's premium. 

• Policy Term: Policy Term is the period during which a policy is active. All benefits and life cover of an insurance policy are valid during this period, and it differs across different policies.

• Premium: Premium is the amount of money you pay to the insurance company in return for the insurance. Premium can be paid via various modes: Annual, half-yearly, or even monthly.

• Death Benefit: The total amount an insurance provider gives to the nominee in case of demise of the life assured. This is mostly equal to the Sum Assured; however, it might be more when riders are added.

• Add-on Benefits (Riders): Add-On Benefits or Riders are the additional coverages on your policy covering some specific conditions like critical illness, accidental death, etc. They come at an additional cost over and above your standard premium.

• Claim: In the case of the life assured's demise, the nominee should file a claim with the insurance company. Basically, it is an intimation to the insurance company about the unfortunate event and the demand for insurance coverage payment.

Read more: Basic Terminologies to Know in Term Insurance