Term Insurance Plans

Term insurance plans or term life assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary/nominee. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium rupee basis over a

specific period of time. Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a the insured’s nominee a sum of money in exchange for a premium, upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.

Why is Life Insurance required?

  • To provide for the family, financial support in order for them to maintain their life style due to the untimely demise of the insured.
  • To finance the insured’s children’s education and ensure it is carried on unhindered due to the unfortunate demise of the insured.
  • To ensure a constant flow of income for the nominee/remaining family members upto retirement or till they have family commitments.
  • Sometimes serious illness or a major accident may not result in death, but rather disability…this means that the family will require money for the medical upkeep of the insured as well as maintenance expenses for the family.

What are the factors to be considered while purchasing a Life Insurance policy?

  • Current income level of the insured and their savings at the given point in time
  • Number of dependants (financially) the insured has and their financial status
  • The cost of maintaining the current lifestyle of the family even after the death of the insured
  • Future expenses for completing the studies of the children
  • Creating a corpus for the family financial well being

Though one cannot exactly value a human life, an approximate sum could be determined based on the loss of income in future years, depending on the age of the insured, his occupation and his/her income. Hence, the Sum Assured ( or the amount guaranteed to be paid in the event of death of the insured) is by way of a ‘benefit’. Life Insurance products also pays the sum insured incase the policyholder becomes disabled on account of an accident.

  • Terms plans are pure Protection plans which ensures financial stability to the insured’s family in case of his/her untimely demise or disability
  • Normally this amount is settled in a lupsum to the insured’s nominee in case of his/her death
  • Term Life is purchased for a fixed duration and the premium rates are standard during the premium paying period
  • Some of the benefits of Term Life include:
    • Death Benefit: In the unfortunate event of death of life insured during policy term
    • Rider Benefits: Riders are one of the critical options available to the insured at the time of purchasing his/her policy…some of the riders include:
      • Accidental Death Benefit rider offers an additional sum assured in case of insured’s unfortunate death due to an accident.
      • Accidental Disability rider
      • Critical Illness rider offers an additional sum assured if the life insured is diagnosed with one of the critical illnesses covered under the policy
      • Waiver of Premium rider offers the waiver of all policy premiums in case the life insured is diagnosed with a disability or critical illness or dies.

Some facts about the Life Insurance Industry in India...

India has amongst the lowest insurance penetrations across the world at 2.72% of GDP in 2016, significantly lower than the world average of 3.47%. Much smaller countries like Taiwan have a penetration of 16.65%. On important point of note is that among the BRIC nations, represented in the chart below, India is doing relatively better than Brazil and China. You will also note that India’s insurance penetration has marginally gone up to 2.76% in 2017, however the global data is not available. All data has been taken from the IRDAI Annual Report 2016-17.

sts term graph

Another parameter that gets generally compared across countries is the Insurance Density. Insurance density is measured or defined as ratio of premium (in US $) to total population of the country. Here India is again significantly worse off than almost all global countries and is more than 80% off the world average density. Again India has shown marginal improvement in 2017, but still has a long way to go.

sts term graph

The Life Insurance Industry in India has been growing steadily over the past years and the March 2018 GPW was $ USD 71.1 billion (almost 500,000 lac crores at today’s exchange). There are currently 24 active Life insurance players (1 Public sector insurer Life Insurance Corporation or LIC and 23 Private Players).

sts term graph
sts term graph

The Private Players have been growing more extensively and aggressively across all channels and hence now enjoy a 32% share (which was 2% 15 years ago). Similarly in terms of products also, the ULIP sensation has now quietened down and now Non Linked products have a significant and dominating 86% of all Life insurance policy sales.

Some Do’s and Dont’s (as prescribed by IRDAI)

  • Think through why you are buying insurance and what core requirements and expectations
  • Seek and receive advice and options patiently
  • Be open-minded but cautious about the advice and information you gather Ask lots of questions about the policy options to see what fits your needs Find out policy details like: Whether it is a Single Premium or Regular Premium policy Which is the best premium payment frequency that suits you eg: Annual, quarterly etc. Whether there is an ECS (Electronic Clearing Service) payment option to make your premium payment safe and easy
  • Fill the proposal form very carefully and personally
  • Fill it completely and truthfully, Remember you are responsible for its contents Make sure that the information you give cannot be disputed during a claim Ensure you fill Nomination details If the form is in one language and you are answering the questions in a different language Ensure the questions are explained correctly to you and That you have understood them completely Remember you have to give a declaration to this effect in the proposal form
  • Keep a copy of the completed proposal form you sign and any declarations and terms agreed upon mutually for your records
  • If you are buying Unit Linked Insurance Policies (ULIPs) ask specific questions about:
    • Various charges
    • Fund options
    • Switching of funds
    • Benefits if you
      • Discontinue the policy
      • Surrender the policy
      • Make a partial withdrawal of funds
  • Do not leave any column blank in the proposal form
  • Do not let anyone else fill it up
  • Do not conceal or misstate any facts as this could lead to disputes at the time of a claim
  • Do not miss or delay your premium payment

Term Life Insurance Policies

Decreasing Term Insurance

Decreasing term insurance is a term life insurance plan that provides a death benefit that decreases at a predetermined rate over the life of the policy. Premiums remains constant while reductions in policy payout typically occur monthly or annually.
For example if your insurance cover Rs. 50 Lakhs for 20 years and suppose the cover decreases by 5% every year, then after 10 years your cover will be Rs.25 Lakhs.

Increasing Premium Term Insurance

Increasing Term Insurance is a term life insurance plan wherein the sum insured rises at a predetermined rate over the life of the policy. The premiums may or may not vary depending on the plan chosen
For example if your insurance cover is Rs. 50 lakhs for 20 years and suppose the cover increases by 5% every year, then after 10 years your cover will be Rs.75 Lakhs.

Return of Premium Term Insurance

As the name suggests the return of premium term insurance is a type of term insurance which will pay back the premium paid by you at the end of the term, in case you survive.
if you pay Rs.10,000 per year for 25 years for a cover of Rs.50 lakhs, the insurance company would repay to you Rs.2.5 lakhs at the end of 25 years in case you survive.

5 Year Level Term Insurance

The face amount of this 5 year term life policy remains level for the entire 5 year period and so does the premium. Upon death the face amount is paid either in one lump sum or in the form of an income.If you have a short term need for life insurance, like covering a bank loan, then this may be the plan for you.

20 Year Term Insurance

The 20 year term insurance policy is probably the most popular of term life policies. The death benefit remains level for the duration and in some cases so does the premium. With some companies, however, the premiums increase after the first 10 years to reflect the cost of the additional risk to which the insurance company is exposed as the insured gets older. All in all, the 20 tear term life insurance policy is fairly inexpensive and does the job it is intended to do.

10 Year Term Insurance

Like the 5 year term policy, the 10 year term life policy can be used to cover a bank loan, but it can do considerably more. It can be used for family protection and a myriad of other needs. The face amount of the policy remains level for the duration and so does the premium. Some companies allow you to continue the policy after 10 years with an increase in premium.

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