Term Insurance for Dummies

Imagine you could bottle your monthly income, hand it to your family, and tell them it will pour out every time you aren’t around to earn it. That’s what term insurance really is—an income-printing machine that turns on when you can’t. The policy does not grow wealth, beat markets, or fund retirement. It is a pure contract that says: “If I die, deposit this much into my family’s bank account.” Once you see it that way, all the jargon becomes far easier to deal with.

Start With The Purpose: Replace Yourself#

You earn ₹12 lakhs a year, pay a ₹25,000 EMI, and cover everyday expenses. If you disappear, the cash flow disappears too, but the expenses keep walking in. A term plan should deliver a lump sum large enough to pay off debt immediately and then throw off interest income that mimics your salary. That’s the benchmark for every decision in this guide.

Step 1: Calculate A Realistic Cover#

Build the number from the ground up#

1. Immediate dues: Outstanding home loan, car loan, personal loans, and high-interest debt.
2. Future commitments: Children’s education/marriage, parents’ medical support, spouse’s retirement buffer.
3. Monthly expenses: Multiply annual household expenses by the number of years your dependents would still rely on you (generally till youngest child becomes independent or till spouse’s retirement corpus is ready).
4. Subtract assets: Cash, investments, and existing life cover that can be liquidated without hurting goals.

Example worksheet:

Liabilities today                   : ₹70,00,000
Future goals (kids + parents)       : ₹80,00,000
Expense replacement (₹6L × 20 yrs)  : ₹1,20,00,000
Total requirement                   : ₹2,70,00,000
Minus liquid assets                 : ₹50,00,000
Recommended cover                   : ₹2,20,00,000 → round up to ₹2.5 crores

The fixed-deposit sanity check#

Whatever cover you choose, ask: “If this money sat in a 6% fixed deposit, would the interest cover my family’s annual expenses after clearing all loans?” If yes, you’ve nailed the number. If no, increase the cover.

Quick heuristics when you’re rushed#

• 15–20× annual income is the bare minimum.
• Add ₹50 lakhs per child for education and start-up capital.
• Add the full outstanding loan balance (do not assume the house can be sold overnight at full value).

Step 2: Choose How Long It Should Last#

Your policy should cover the window during which someone depends on your income. That typically means until your planned retirement age or the point where investments can replace you entirely.

Going beyond 70 sounds comforting but gets ridiculously expensive. A ₹1 crore cover at age 30 till 60 might cost ₹12,000 annually; stretching it to 75 can double or triple the premium for marginal extra protection. Let investments take over after 60-65.

Step 3: Understand What You Pay For#

Premiums depend on age, cover, term, and health. Buy early and stay truthful. A healthy 30-year-old can lock ₹2 crores for ~₹20,000 a year. Wait till 40, and the same cover often crosses ₹35,000. Wait till 50, and medical tests plus higher risk can make the premium unaffordable or the insurer may decline altogether.

Keep These Features In Your Toolkit#

Life-stage upgrade options#

If you buy young, your life will outgrow your original cover. Policies that allow “life-stage” top-ups let you increase the sum assured after marriage, childbirth, or big-ticket loans without fresh medical tests. Each event usually allows a 25–50% bump with a clear deadline (often within 6–12 months of the event). Expect a slight premium increase each time the cover rises.

Waiver of premium (WoP)#

Permanent disability or critical illness can wipe out income long before death. A waiver-of-premium rider tells the insurer to continue the policy on your behalf if you’re permanently disabled or diagnosed with a listed critical illness. The rider costs roughly ₹1,000 per year on a ₹2 crore plan and prevents you from dropping the policy precisely when your family needs it most.

Critical illness payout#

Unlike health insurance that reimburses bills, a critical illness rider hands you a lump sum (₹25–₹50 lakhs typically) on diagnosis of severe conditions such as cancer, heart attack, kidney failure, or major organ transplant. You stay alive and receive cash immediately. The rider amount is carved out of your base cover, so a ₹2 crore policy with a ₹50 lakh critical illness rider will leave ₹1.5 crores as the eventual death benefit after the rider is paid.

Accidental death booster#

This rider pays an additional amount if death is caused by a covered accident. Instead of ₹2 crores, your family could receive ₹3 crores. Evaluate it only if you have a risky job or commute, because the same money might buy more comprehensive base cover that pays regardless of how you pass away.

Inflation-Proofing The Cover#

Term plans give a fixed number, but your family’s expenses will inflate. You can tackle this in two ways:

1. Buy the future requirement upfront. If today’s calculation points to ₹1.5 crores and you expect to need the cover for 25 years, factor in 6% inflation and buy ~₹3 crores now. Premiums barely double while the protection almost doubles.
2. Use increasing-cover variants cautiously. Some insurers raise the sum assured by 5–10% annually. Sounds elegant but premiums are 40–60% higher for the same starting cover. For most people, buying a larger fixed cover is cheaper and simpler.

Decreasing-cover plans cut the sum assured every year to track shrinking loans. The premium falls a bit, but you lose the ability to scale the cover back up if life doesn’t go as planned. It’s usually better to keep a level cover and let your growing investments naturally reduce the need for insurance.

Essential Checklist Before You Buy#

• ✅ Cover amount replaces all liabilities + long-term expenses.
• ✅ Policy term extends till financial independence for dependents.
• ✅ Claim settlement ratio is consistently above 95% for the insurer.
• ✅ Premium is level for the whole term; no hidden step-ups.
• ✅ Medical tests are completed transparently and reports documented.
• ✅ Riders chosen solve real problems (waiver, critical illness, life-stage upgrade) rather than shiny add-ons.
• ✅ Nominee details are updated and shared with family members.

Common Traps To Avoid#

1. Mixing investment and insurance. ULIPs or endowment plans dilute both goals. Buy cheap term cover and invest the difference in equity or debt funds.
2. Delaying the purchase. Every birthday adds cost. Worse, a single diagnosis can render you uninsurable.
3. Understating health facts. Insurers have three years to contest fraud. Hide a condition and they can void the claim.
4. Relying solely on employer-provided cover. Group policies vanish the day you switch jobs or companies change providers.
5. Never reviewing the cover. Check every 3–5 years or after major life events to see if you need an additional policy.

Make The Claim Process Foolproof For Your Family#

Leave a simple playbook with your nominee:

1. Notify the insurer quickly. Call customer care, share policy number, and get a claim reference.
2. Collect documents. Death certificate, policy papers, ID proofs, hospital records, and police reports (if accidental).
3. Submit and track. Fill the claim form, attach documents, and take an acknowledgment. Insurers in India typically settle clean term claims within 30 days.
4. Escalate if delayed. IRDAI mandates reasons for any delay beyond 30 days. Keep helpline numbers and email addresses handy in your documentation folder.

Also include bank details for the nominee, photocopies of IDs, and the latest premium receipt in the same folder. The easier you make the paperwork, the faster the payout arrives.

Final Word#

Term insurance is not exciting, but it is the only product that guarantees your loved ones won’t have to liquidate dreams because you weren’t around. Decide the cover like an engineer (numbers first), pick a term that matches your responsibility window, bolt on only the riders you truly need, and tell your family exactly how to claim it. Do this once, review it occasionally, and you can forget about term insurance—because that’s exactly how it’s supposed to work.