Term Insurance for Dummies

Here’s a thought experiment: What if you could buy a financial replica of yourself? Not a physical clone (that would be weird), but something that earns like you, provides like you, and steps in exactly when your family needs you most—when you’re no longer around.

That’s term insurance. It’s the closest thing to a financial version of yourself that money can buy. Pay a small annual fee, and if you die, your family gets ₹1 crore, ₹5 crore, or even ₹10 crore. No complexity, no investment component—just pure, simple protection.

But here’s the catch: buying term insurance without understanding the details is like buying a car without knowing if it has an engine. This guide walks you through everything you need to know.

What Is Term Insurance? (And Why You Need It)

The Simple Version:

You pay ₹15,000 every year. If you die during the policy term, your family gets ₹1 crore. If you survive, you get nothing back.

Why This Matters:

You’re the breadwinner. Your family depends on your ₹50,000 monthly income. You have:

A home loan EMI of ₹25,000/month
Kids’ education expenses
Daily household costs
Your spouse who may not earn enough

What Happens If You Die Tomorrow?

Without insurance:

Your family loses ₹50,000/month income
Home loan of ₹60 lakhs still needs to be paid
Kids’ education (₹20 lakhs over 10 years) is at risk
Savings dry up within 2-3 years

With ₹1 crore term insurance:

Your family receives ₹1 crore
They invest it in fixed deposits at 6% = ₹6 lakhs/year (₹50,000/month)
Home loan gets paid off: ₹60 lakhs
Remaining ₹40 lakhs covers education and emergency needs

You’ve been financially replaced.

The Ironclad Promise

Term insurance companies have to pay. Unless:

You commit suicide within 1 year of buying the policy
You die while committing a crime (murder, terrorism, etc.)

That’s it. Those are the only two exceptions.

What About Fraud?

The insurer has 3 years to uncover fraud (like hiding medical conditions). After 3 years, they must pay, even if they later discover you lied.

The Claim Process:

Death → Nominee files claim → Insurance company verifies → Money paid within 30 days

Real Statistics:

Average claim settlement ratio: 95%+
Average claim processing time: 10-15 days
Amount paid: Full sum assured (no deductions)

How Much Cover Do You Need?

This is the ₹1 crore question. Literally.

Method 1: The Human Life Value Approach

Formula: Annual Income × Years Till Retirement

Example:

Your age: 30
Retirement age: 60
Annual income: ₹10 lakhs
Cover needed: ₹10L × 30 years = ₹3 crores

Problem: This doesn’t account for existing savings, inflation, or changing needs.

Method 2: The Need-Based Approach (Better)

Calculate your family’s total financial needs:

text file

Immediate Liabilities:
  Home loan outstanding          : ₹60,00,000
  Car loan outstanding           : ₹5,00,000
  Personal loan                  : ₹3,00,000
  Credit card debt               : ₹1,00,000
                                   -----------
  Total Debt                     : ₹69,00,000

Future Financial Goals:
  Children's education (2 kids)  : ₹40,00,000
  Children's marriage (2 kids)   : ₹30,00,000
  Emergency fund (2 years)       : ₹12,00,000
                                   -----------
  Total Goals                    : ₹82,00,000

Annual Income Replacement:
  Monthly expense                : ₹50,000
  Annual expense                 : ₹6,00,000
  Years of replacement needed    : 20 years
  Income replacement needed      : ₹1,20,00,000

TOTAL NEED                       : ₹2,71,00,000

Minus Existing Assets:
  Current savings                : ₹15,00,000
  Investments (FD, MF, stocks)   : ₹25,00,000
  Other insurance                : ₹10,00,000
                                   -----------
  Total Assets                   : ₹50,00,000

FINAL COVER NEEDED               : ₹2,21,00,000
Round up to                      : ₹2,50,00,000 (₹2.5 Crores)

The Fixed Deposit Test

Whatever cover you choose, put it through the FD test:

If your family gets ₹2.5 crores:

Invest in FD at 6% per year
Annual interest: ₹15 lakhs
Monthly income: ₹1,25,000

Can your family maintain their lifestyle on ₹1,25,000/month while paying off debts and funding goals?

If yes: Cover is adequate
If no: Increase cover

Quick Rules of Thumb

Minimum cover: 10x your annual income
Ideal cover: 15-20x your annual income
If you have kids: Add ₹50 lakhs per child
If you have loans: Add total outstanding loan amount

Example:

Annual income: ₹12 lakhs
Basic cover: ₹12L × 15 = ₹1.8 crores
Two kids: +₹1 crore
Home loan: +₹60 lakhs
Total cover needed: ₹3.4 crores

How Long Should Your Policy Last?

The Question: Till what age do you need coverage?

The Answer: Till your family becomes financially independent.

Age-Based Analysis

Age 30:

Kids are young (financial dependents)
Spouse may not earn enough
Huge liabilities (home loan)
Minimal savings
Coverage needed: 30 years (till age 60)

Age 40:

Kids still dependent
Some savings accumulated
Loans partially paid
Coverage needed: 20 years (till age 60)

Age 50:

Kids in college/working
Substantial savings
Loans mostly cleared
Coverage needed: 10-15 years (till age 60-65)

Age 60+:

Kids financially independent
Retirement corpus ready
No loans
Coverage needed: Minimal or none

The Sweet Spot: Age 60-70

Why stop at 60?

Kids are independent
You have retirement savings
Spouse has their own corpus
You’re no longer the sole breadwinner

Why not beyond 70?

Average life expectancy in India: 70 years
Premium becomes very expensive after 70
Diminishing returns on coverage

Cost Comparison (₹1 Crore Cover):

Policy Term	Age 30 Premium/Year	Total Paid
Till age 60 (30y)	₹12,000	₹3,60,000
Till age 65 (35y)	₹15,000	₹5,25,000
Till age 70 (40y)	₹22,000	₹8,80,000
Till age 75 (45y)	₹38,000	₹17,10,000

Notice: Premium more than doubles for 5 extra years after 70.

Recommendation: Policy term till age 60-65 is optimal for most people.

Life Stage Benefit: Built-In Flexibility

The Problem:

You’re 25, unmarried, and buy a ₹1 crore term policy. Smart move.

Five years later:

You’re married
You have a kid
You took a home loan
Your expenses tripled

Your ₹1 crore cover now looks inadequate. But term insurance is rigid—you can’t increase coverage.

The Solution: Life Stage Benefit

This rider lets you increase your cover during major life events, without fresh medical tests.

How It Works

Initial Policy:

Age 25
Cover: ₹1 crore
Premium: ₹8,000/year

Life Event 1: Marriage (Age 27)

Trigger: Life stage benefit
Increase cover by: ₹50 lakhs
New cover: ₹1.5 crores
New premium: ₹12,000/year

Life Event 2: First Child (Age 29)

Trigger: Life stage benefit
Increase cover by: ₹50 lakhs
New cover: ₹2 crores
New premium: ₹16,000/year

Life Event 3: Second Child (Age 32)

Trigger: Life stage benefit
Increase cover by: ₹50 lakhs
New cover: ₹2.5 crores
New premium: ₹20,000/year

Allowed Life Events (Typical)

Marriage
Birth/adoption of child
Home loan taken
Career milestone (promotion/new job with 50%+ salary hike)

The Catch

No medical tests needed: Uses your health status from original policy
Time limits: Usually must be exercised within 1 year of life event
Maximum increase: Usually 50% of original sum assured per event
Total cap: Maximum 200% of original sum assured

Who Needs This?

✅ Yes, if you’re:

Unmarried and planning to marry
Married without kids, planning for kids
Early in career (income will rise significantly)

❌ No, if you’re:

Already married with kids
Financially settled with appropriate cover
Willing to buy a new policy later (involves medical tests)

Cost: Extra ₹500-₹1,000/year

Worth it? Absolutely, if you expect major life changes.

Waiver of Premium: When You Can’t Pay

The Nightmare Scenario:

You’re 35. Car accident leaves you permanently disabled. You can’t work anymore.

Your monthly expenses now include:

Medical care: ₹20,000
Regular expenses: ₹50,000
Total: ₹70,000/month

Your income: ₹0

You have a ₹2 crore term insurance policy. Premium: ₹20,000/year.

The Dilemma:

Do you keep paying ₹20,000 annual premium when you have no income?

Most people would drop the policy. But that means your family loses the ₹2 crore protection.

Waiver of Premium Rider

What It Does:

If you become permanently and totally disabled, the insurance company waives all future premiums. Your policy continues without you paying anything.

Example:

Policy: ₹2 crore, 25 years remaining, ₹20,000/year premium

Year 5: You become permanently disabled

What Happens:

You paid premium for 5 years: ₹1,00,000
Insurance company pays premium for next 20 years: ₹4,00,000
Your ₹2 crore cover continues
Your family remains protected

Permanent Disability Criteria:

Usually requires loss of:

Both eyes
Both hands
Both feet
One hand and one foot
Any combination that makes you unable to work

Critical Illness Version

Some policies offer waiver if you’re diagnosed with critical illness:

Cancer
Heart attack
Kidney failure
Stroke
Major organ transplant

Example:

You’re diagnosed with cancer at age 40. You need to quit work for treatment.

With waiver of premium:

Premium waived for remaining policy term
₹2 crore cover continues
One less financial worry during treatment

Cost-Benefit Analysis

Policy Details:

Cover: ₹2 crores
Premium: ₹20,000/year
Term: 30 years
Waiver rider cost: ₹1,000/year extra

Scenario: Disabled at Year 10

Without waiver:

Paid for 10 years: ₹2,00,000
Can’t afford remaining 20 years
Drop policy
Family loses ₹2 crore protection

With waiver:

Paid ₹21,000/year for 10 years: ₹2,10,000
Insurance company pays next 20 years: ₹4,00,000
Family keeps ₹2 crore protection
Net benefit: ₹4,00,000 - ₹10,000 extra paid = ₹3,90,000

Recommendation: Strongly consider this rider, especially if you’re the sole breadwinner.

Accidental Death Benefit: Double Protection

The Statistic:

India has one fatal road accident every 4 minutes. That’s 360 deaths per day. 1,31,000 deaths per year.

The Question:

Should you pay extra for accidental death coverage?

How It Works

Base Policy:

Cover: ₹2 crores
Premium: ₹20,000/year

Add Accidental Death Benefit Rider:

Additional cover: ₹1 crore (usually 50% of base)
Extra premium: ₹1,500/year

What Happens:

Death by natural causes:

Payout: ₹2 crores

Death by accident:

Base payout: ₹2 crores
Accidental rider payout: ₹1 crore
Total payout: ₹3 crores

What Qualifies as Accident?

✅ Covered:

Road accidents (car, bike, pedestrian)
Drowning
Falls
Fire
Electrocution
Natural disasters (earthquake, floods)
Aviation accidents (as passenger)

❌ Not Covered:

Suicide (intentional)
Self-inflicted injuries
Drug/alcohol overdose (intentional)
While committing crime
War/nuclear events

Cost-Benefit Analysis

Scenario 1: High-Risk Profession/Commute

You commute 50 km daily on a highway. Risk is real.

Extra premium: ₹1,500/year
Extra cover: ₹1 crore
Worth it? Yes. The extra ₹1 crore provides meaningful additional protection.

Scenario 2: Low-Risk Lifestyle

You work from home. Rarely travel. Low accident risk.

Extra premium: ₹1,500/year
Probability of accidental death: Low
Worth it? Questionable. Better to increase base cover.

Better Alternative?

Instead of: ₹2 Cr base + ₹1 Cr accident rider = ₹21,500/year

Consider: ₹2.5 Cr base cover = ₹23,000/year

The ₹2.5 Cr base cover protects against all causes of death, not just accidents. For ₹1,500 more, you get better coverage.

Recommendation: Only take accidental death benefit if:

You have high accident risk (long commute, high-risk job)
You already have maximum base cover you can afford
Rider cost is very low (₹1,000/year or less)

Otherwise: Increase your base cover instead.

Critical Illness Rider: Living Benefits

The Reality:

You’re diagnosed with cancer at age 42. You need immediate treatment.

The Problem:

Term insurance only pays if you die. But cancer treatment needs to start now.

You need:

₹15 lakhs for surgery and chemotherapy
6 months off work (₹3 lakhs lost income)
Experimental treatments not covered by health insurance
Total: ₹20-25 lakhs

Your savings: ₹8 lakhs. You’re ₹15 lakhs short.

Critical Illness Rider to the Rescue

What It Does:

If you’re diagnosed with a critical illness, the insurer pays you a lump sum immediately. You’re alive and get the money.

Base Policy:

Cover: ₹2 crores (pays on death)
Premium: ₹20,000/year

Add Critical Illness Rider:

Critical illness cover: ₹50 lakhs
Extra premium: ₹5,000/year

Diagnosis: Cancer at Age 42

What happens:

You get diagnosed
You submit medical reports
Insurance company pays ₹50 lakhs immediately
Your ₹2 crore term cover reduces to ₹1.5 crores

Use of ₹50 lakhs:

Cancer treatment: ₹20 lakhs
Income replacement: ₹15 lakhs
Emergency fund: ₹10 lakhs
Recovery expenses: ₹5 lakhs

Which Illnesses Are Covered?

Typically 15-40 critical illnesses, including:

Cancer (all stages, though some policies exclude early stages)
Heart attack (first attack, sometimes subsequent ones too)
Stroke (causing permanent neurological damage)
Kidney failure (requiring dialysis/transplant)
Major organ transplant (heart, lung, liver, kidney)
Coronary artery bypass surgery
Paralysis (permanent)
Multiple sclerosis
Blindness (permanent and irreversible)
Deafness (permanent and irreversible)
Alzheimer’s disease
Parkinson’s disease
Motor neuron disease
Coma (lasting specified period)
Major burns (covering specified body percentage)

The Catch: Severity Requirements

Not all cancers or heart conditions qualify. Most policies require:

Cancer:

Must be malignant (not benign)
Must have spread to other organs
Early-stage cancers often excluded

Heart Attack:

Must show specific ECG changes
Must have elevated cardiac enzymes
Must cause permanent heart damage

Read the fine print carefully.

Impact on Term Cover

Payout Structure:

Most policies reduce your death cover by the critical illness amount paid.

Example:

Original cover: ₹2 crores Critical illness cover: ₹50 lakhs Critical illness diagnosed and ₹50 lakhs paid

New death cover: ₹1.5 crores

If you later die:

Family receives: ₹1.5 crores (not ₹2 crores)

Cost-Benefit Analysis

Policy Details:

Age: 35
Base cover: ₹2 crores at ₹20,000/year
Critical illness rider: ₹50 lakhs at ₹5,000/year extra
Term: 25 years

Scenario 1: No Critical Illness

Total premium paid: ₹6,25,000 (₹25,000 × 25 years)
Benefit received: None (you survive)
Death cover: ₹2 crores maintained

Scenario 2: Critical Illness at Year 10

Premium paid: ₹2,50,000 (₹25,000 × 10 years)
Benefit received: ₹50 lakhs immediately
Remaining death cover: ₹1.5 crores

Should You Buy It?

✅ Yes, if:

Family history of critical illnesses (cancer, heart disease)
High-stress job (increases heart attack risk)
You don’t have substantial savings (₹20+ lakhs)
Health insurance has low coverage

❌ No, if:

You have comprehensive health insurance
Large emergency fund (₹50+ lakhs liquid)
Premium increase is too high (>30% of base premium)

Better Alternative: Standalone Critical Illness Policy

Instead of rider, consider standalone critical illness insurance:

Advantages:

Doesn’t reduce term cover
Usually broader illness coverage
Can be renewed even after term policy expires
Sometimes cheaper

Disadvantages:

Separate policy to manage
Separate claim process
May require fresh medical tests

Recommendation: If you can afford it, buy both comprehensive health insurance and a moderate critical illness rider (₹25-50 lakhs). This creates a strong safety net.

Terminal Illness Rider: The Last Resort

The Scenario:

Doctor’s diagnosis: Stage 4 cancer. Life expectancy: 6 months.

You want to fight. You want the best treatment—experimental therapy, overseas hospitals, anything that gives you a chance.

Cost: ₹50 lakhs.

Your savings: ₹10 lakhs.

Your term insurance: ₹2 crores. But it only pays after you die.

Terminal Illness Rider

What It Does:

If you’re diagnosed with a terminal illness (life expectancy < 12 months), the insurer pays your entire term cover immediately. While you’re alive.

Your Situation:

Term cover: ₹2 crores
Terminal illness rider: Included
Diagnosis: Terminal cancer, 6 months to live

What Happens:

Doctor certifies terminal illness
You submit claim with medical reports
Insurance company verifies
You receive ₹2 crores immediately
You use it for treatment/family needs

The Beautiful Part:

Even if you survive beyond 6 months (miracle recovery), the insurer doesn’t ask for money back. It’s yours.

Requirements for Claim

Medical certification: Registered doctor certifies life expectancy < 12 months
Second opinion: Insurance company may require independent medical assessment
Specific conditions: Usually limited to:
- Terminal cancer
- End-stage organ failure
- Advanced neurological disorders
- Other life-threatening conditions

The Reality Check

Approval Rates Are Low

Why?

Doctors hesitate to certify “6 months to live” (medical ethics)
Insurance companies scrutinize heavily (large payout)
“Terminal” is subjective and hard to prove
Modern medicine makes prognosis uncertain

Example:

You have advanced cancer. Your oncologist says: “Could be 6 months, could be 2 years with treatment. Hard to say.”

Insurance company’s response: Not terminal enough. Claim denied.

Cost and Trade-offs

Cost: Usually ₹500-₹1,500/year extra

The Catch: Some policies make this a full payout, meaning:

You get entire ₹2 crores for terminal illness
Your term cover becomes zero
If you die, family gets nothing more

Others offer partial payout:

You get ₹50 lakhs for terminal illness
Death cover reduced to ₹1.5 crores
Family gets ₹1.5 crores upon death

Should You Buy It?

Honest Assessment:

This rider sounds amazing but has low practical utility.

Reasons:

Very difficult to qualify (strict criteria)
Low approval rates in India
When diagnosed terminal, health insurance + savings usually cover treatment
Critical illness rider is often more useful (easier to claim)

Alternative Strategy:

Instead of terminal illness rider, consider:

Higher critical illness cover: Easier to claim, broader conditions
Comprehensive health insurance: Covers treatments without terminal diagnosis
Larger emergency fund: Accessible immediately without claim process

Recommendation: Only add if:

It’s very cheap (₹500/year or less)
Bundled free with policy
You have strong family history of terminal conditions

Otherwise: Your money is better spent on higher critical illness cover or health insurance.

Increasing Cover: Inflation Protection

The Problem:

You’re 30. You buy ₹1 crore term insurance.

Fast forward 15 years. You’re 45.

Inflation averaged 6% annually. ₹1 crore 15 years ago equals ₹2.4 crores today in purchasing power.

Your ₹1 crore cover now has the buying power of ₹42 lakhs in today’s money.

Your cover lost 58% of its value to inflation.

Solution 1: Increasing Cover Option

How It Works:

Your sum assured increases by 5-10% every year automatically.

Example:

Year 1: ₹1 crore cover Year 2: ₹1.05 crores (+5%) Year 3: ₹1.10 crores (+5%) … Year 15: ₹1.98 crores Year 20: ₹2.53 crores

The Inflation Fight:

Your cover grows 5% per year
Inflation averages 6% per year
You almost keep pace with inflation

The Cost

Regular Term Insurance:

Cover: ₹1 crore (fixed)
Premium: ₹12,000/year (fixed for entire term)
Total premium (30 years): ₹3,60,000

Increasing Cover Term Insurance:

Cover: ₹1 crore increasing by 5% per year
Premium: ₹18,000/year (50-60% higher)
Total premium (30 years): ₹5,40,000
Extra cost: ₹1,80,000

The Math: Which Is Better?

Option A: Buy ₹1 crore increasing cover

Premium: ₹18,000/year
Final cover (Year 30): ₹4.3 crores

Option B: Buy ₹2 crore fixed cover

Premium: ₹20,000/year
Final cover: ₹2 crores

Option B is often better because:

Only ₹2,000 more per year
You get ₹2 crore cover from Day 1 (not Year 30)
Simpler to understand
No complexity in premium calculation

Solution 2: Buy Adequate Cover Upfront

Smart Approach:

Calculate cover needed 20 years from now, accounting for inflation.

Example:

Current need: ₹1 crore Inflation: 6% per year Time horizon: 20 years

Future value of ₹1 crore after 20 years = ₹1 crore × (1.06)^20 = ₹3.2 crores

Buy ₹3.2 crore cover today.

Advantages:

Full protection from Day 1
No premium confusion
Simpler claim process
Usually cheaper than increasing cover

Cost:

₹3.2 crore cover at age 30: ~₹28,000/year
Still cheaper than increasing cover option
Better protection throughout

Recommendation

Increasing cover makes sense only if:

You can’t afford adequate cover today
You’re very young (25-30) and expect income to grow significantly
Premium increase is minimal (10-20%, not 50-60%)

For most people: Calculate your future need, account for inflation, and buy adequate fixed cover today.

Decreasing Cover: Lower Premium as You Age

The Logic:

You’re 30. Your financial obligations:

₹60 lakh home loan (25 years remaining)
Two young kids dependent on you
Spouse may not earn enough
Minimal savings

You need: ₹2 crore cover

Fast forward to age 50:

Home loan: ₹10 lakhs remaining (almost paid off)
Kids: Financially independent
Spouse: Has own income/pension
Savings: ₹60 lakhs accumulated

You need: Maybe ₹50 lakhs cover

Decreasing Cover Option

How It Works:

Your sum assured decreases every year. Your premium decreases proportionally.

Example:

Year 1: ₹2 crore cover, ₹20,000 premium Year 5: ₹1.8 crores cover, ₹18,000 premium Year 10: ₹1.5 crores cover, ₹15,000 premium Year 15: ₹1.2 crores cover, ₹12,000 premium Year 20: ₹1 crore cover, ₹10,000 premium

Total Premium Saved: Significant over 20 years

When It Makes Sense

✅ Good fit if:

You have large loans that decrease over time (home loan EMIs)
Kids will become independent in 10-15 years
You’re systematically building savings/investments
You have other income sources developing (rental income, spouse’s income)

❌ Bad fit if:

Financial obligations won’t decrease
Lifestyle expenses may increase
Uncertain about future financial needs
You’re not aggressively saving

The Hidden Risk

Problem: Life is unpredictable.

Examples:

Scenario 1:

Year 15: Your cover decreased to ₹1 crore
Your daughter wants to pursue MS abroad: ₹50 lakhs needed
Your elderly parents need expensive medical care
₹1 crore suddenly looks inadequate

Scenario 2:

Year 20: Your cover decreased to ₹80 lakhs
You took a business loan: ₹40 lakhs
Medical emergency depleted savings
₹80 lakhs won’t cover everything

You can’t reverse the decrease. Once cover is reduced, it stays reduced.

Better Alternative: Level Cover + Systematic Investment

Instead of decreasing cover, try this:

Option A: Decreasing Cover

Start: ₹2 crore, ₹20,000/year
Year 20: ₹1 crore, ₹10,000/year
Average premium saved per year: ₹5,000
Total saved in 20 years: ₹1,00,000
Risk: Under-insured if needs don’t decrease

Option B: Level Cover + Investment

Maintain: ₹2 crore, ₹20,000/year throughout
Invest in mutual funds/PPF separately
By Year 20: Your investments cover the gap
Benefit: Flexibility + guaranteed cover

Why Option B is better:

If your needs decrease → Your investments cover the gap

If your needs don’t decrease → You still have full ₹2 crore cover

Recommendation

Decreasing cover sounds logical but is risky in practice.

Better approach:

Buy adequate level cover
Invest systematically to build your own corpus
Your corpus naturally replaces the need for insurance
You have flexibility if situations change

Only consider decreasing cover if:

You have a specific decreasing liability (like a home loan)
You’re absolutely certain your needs will decrease
Premium savings are substantial (30%+ reduction)

The Term Insurance Checklist

Before buying any term insurance policy, verify:

Essential Features (Non-Negotiable)

✅ Sum Assured: 15-20x your annual income minimum

✅ Policy Term: Till age 60-65

✅ Claim Settlement Ratio: Insurer should have 95%+ CSR

✅ Premium: Fixed (not increasing) throughout policy term

✅ Death Benefit: 100% sum assured (no deductions)

✅ Suicide Clause: 1 year (not longer)

✅ Grace Period: 30 days minimum for premium payment

Strongly Recommended Riders

✅ Life Stage Benefit: If unmarried or no kids yet

✅ Waiver of Premium: Especially if sole breadwinner

✅ Critical Illness: ₹25-50 lakhs coverage minimum

Evaluate Case-by-Case

⚠️ Accidental Death Benefit: Only if high accident risk or very cheap

⚠️ Terminal Illness Rider: Low utility, difficult to claim

⚠️ Increasing Cover: Usually better to buy higher fixed cover

⚠️ Decreasing Cover: Risky unless certain about decreasing needs

Red Flags: Walk Away If You See These

❌ Premium increases over time (except in increasing cover option)

❌ Low claim settlement ratio (<90%)

❌ Hidden charges (policy administration fees, etc.)

❌ Maturity benefits promised (it’s term insurance, there shouldn’t be any)

❌ Investment component (that’s ULIP, not pure term insurance)

❌ Very limited network for claim processing

❌ Pushy sales tactics (“offer expires today!“)

The Buying Process: Step by Step

Step 1: Calculate Your Cover

Use the need-based approach:

text file

Loans + Future goals + (Annual expenses × Years) - Existing assets = Cover needed

Step 2: Decide Policy Term

Usually till age 60-65, when:

Kids are independent
Loans are paid off
Retirement corpus is ready

Step 3: Choose Riders

Based on your situation:

Unmarried? → Life stage benefit
Sole breadwinner? → Waiver of premium
Family history of illness? → Critical illness

Step 4: Compare Insurers

Check:

Claim settlement ratio: IRDAI publishes annual reports
Settlement time: Average days to process claims
Customer reviews: Especially claim experiences
Financial stability: Solvency ratio (should be >1.5)

Top insurers by claim settlement ratio:

Max Life (99.35%)
HDFC Life (99.03%)
ICICI Prudential (98.35%)
SBI Life (97.42%)
LIC (97.79%)

Step 5: Apply Online

Advantages:

10-15% cheaper than offline
Faster processing
Digital policy document
Easy claim tracking

Step 6: Medical Tests (If Required)

Usually required if:

Sum assured > ₹50 lakhs
Age > 45 years
Pre-existing medical conditions

Tests typically include:

Blood pressure
Blood test (sugar, cholesterol)
Urine test
ECG (if over 45)
BMI measurement

Step 7: Be Honest About Health

Critical: Disclose ALL medical conditions

Examples of what to disclose:

Diabetes (even controlled)
Hypertension (even on medication)
Thyroid disorders
Asthma
Previous surgeries
Family history of critical illness

Why honesty matters:

Insurer has 3 years to investigate fraud
They will check medical records during claims
One hidden condition can invalidate entire policy
Your family loses crores in claims

Step 8: Review Policy Document

When you receive the policy:

Check sum assured is correct
Verify policy term
Confirm riders included
Note premium payment dates
Understand exclusions
Keep digital and physical copies

Step 9: Inform Nominee

Tell your nominee:

Policy exists
Where policy document is kept
Insurance company details
How to file a claim

Many claims go unclaimed because families don’t know about the policy.

Common Mistakes to Avoid

1. Buying Too Little Cover

Mistake: “₹50 lakhs should be enough”

Reality: ₹50 lakhs invested at 6% = ₹3 lakhs/year = ₹25,000/month

Can your family survive on ₹25,000/month?

Fix: Calculate properly. Aim for 15-20x annual income.

2. Delaying Purchase

At Age 25: ₹1 crore, 35 years = ₹8,000/year

At Age 35: ₹1 crore, 25 years = ₹12,000/year

At Age 45: ₹1 crore, 15 years = ₹25,000/year

You pay 3x more if you wait 20 years.

Plus, health complications may make you uninsurable.

3. Buying from Family/Friends

Scenario: Your cousin is an insurance agent. You buy from him without research.

Problems:

May not be the best policy
Claim settlement ratio ignored
Expensive riders added
Difficult to question/change later

Fix: Compare multiple insurers. Buy what’s best for YOU.

4. Mixing Investment and Insurance

Agent’s pitch: “Why waste money on term insurance? Buy ULIP—you get insurance + returns!”

Reality:

ULIPs have high charges (3-5% of premium)
Returns are mediocre (6-8%)
Insurance cover is usually inadequate
Lock-in period of 5 years

Better approach:

Buy term insurance for protection
Invest in mutual funds separately

Example:

Option A: ULIP

Premium: ₹1,00,000/year
Insurance cover: ₹10 lakhs
Expected returns: 8%
Charges: 3%

Option B: Term + Mutual Fund

Term insurance: ₹2 crores at ₹20,000/year
Invest remaining ₹80,000 in mutual funds
Expected returns: 12%
Charges: 1%

After 20 years:

ULIP: ₹10L insurance + ₹40L corpus

Term + MF: ₹2Cr insurance + ₹60L corpus

Option B wins.

5. Not Reviewing Coverage

Life changes:

Got married → Need more cover
Had kids → Need more cover
Took home loan → Need more cover
Salary doubled → Need more cover

Fix: Review term insurance every 3-5 years. Buy additional policy if needed.

6. Relying Only on Employer Coverage

Company provides: ₹50 lakhs group term insurance

You think: “I’m covered!”

Reality:

Coverage ends when you leave job
Not portable to new company
Usually inadequate amount
No control over policy terms

Fix: Buy your own term insurance. Treat employer coverage as bonus.

The Claim Process: What Your Family Needs to Know

When You Die, Your Nominee Should:

Step 1: Inform Insurance Company (Within 24-48 hours)

Call customer care
Provide basic details
Get claim number

Step 2: Collect Required Documents

Death certificate (original + copies)
Policy document
Claim form (from insurer)
Nominee ID proof
Nominee bank details
Your ID proof
Hospital/medical records (if applicable)
Police report (if accidental/unnatural death)
Post-mortem report (if unnatural death)

Step 3: Submit Claim

Fill claim form
Attach all documents
Submit to nearest branch or online
Get acknowledgment receipt

Step 4: Investigation (If Required)

Insurer may investigate if:
- Death within 3 years of policy
- Unnatural death
- High sum assured
- Suspicion of fraud
Investigation typically takes 30-90 days

Step 5: Claim Settlement

Once approved, amount paid to nominee’s bank account
Usually within 30 days of document submission
Full sum assured (no deductions)

Claim Rejection Reasons

Death within 1 year due to suicide
Death while committing crime
Fraud/misrepresentation (hidden medical conditions)
Premium not paid (policy lapsed)
Death due to excluded cause (war, nuclear event)
Incomplete documentation

Rejection Rate: 5-7% of claims

Most rejections are due to fraud/non-disclosure, which is why honesty during application is critical.

Final Thoughts: The Best Financial Decision You’ll Make

Here’s the truth: Term insurance is the only financial product where you pay money and hope you never get it back.

It’s the exact opposite of an investment. There’s no fancy returns, no maturity benefits, nothing. You pay ₹15,000 every year, and if you survive the policy term, you get ₹0 back.

And that’s exactly why it’s brilliant.

Because the day you don’t come home—the day your family needs money the most—that ₹15,000 annual payment becomes ₹2 crores.

Your home loan? Paid. Your kids’ education? Covered. Your spouse’s financial security? Ensured.

You’ve been financially replaced.

For ₹15,000 a year, you’ve guaranteed your family won’t have to choose between grief and bills. They won’t have to move to a smaller house. Your kids won’t have to drop out of school. Your spouse won’t have to panic about money.

That’s worth way more than any investment return.

Here’s what to do today:

Calculate your cover (15-20x annual income)
Choose policy term (till age 60-65)
Add critical riders (life stage, waiver of premium, critical illness)
Compare 3-4 insurers (check claim settlement ratio)
Buy online (10-15% cheaper)
Pay on time, every time

And then hope you never need it. But sleep peacefully knowing your family is protected.

References:

Ditto Term Insurance 101
IRDAI (Insurance Regulatory and Development Authority of India) Annual Reports
Claim Settlement Ratio data (IRDAI, 2023)
Personal finance principles and case studies