Term Life Insurance: What It Is and How Much Cover You Need
Understand term insurance in India — how it works, how much cover to buy, and how to choose a policy.
What Is Term Insurance?
Term insurance is pure life insurance — it pays a lump sum (death benefit) to your nominee if you die during the policy term. If you survive the term, nothing is paid out (no maturity benefit). This simplicity makes term insurance extremely affordable.
A Rs 1 crore term cover for a 30-year-old non-smoker costs approximately Rs 8,000-12,000 per year. The same amount in traditional endowment or ULIP policies would cost Rs 80,000-1,00,000 per year.
Why Term Insurance Over Other Life Insurance
The primary purpose of life insurance is replacing your income for dependents if you die. Term insurance does this efficiently.
ULIP and endowment plans combine insurance with investment — but do both poorly. The insurance component is small relative to premium, and the investment returns are below what equity mutual funds provide.
Buy term insurance for protection. Invest separately in mutual funds for wealth building.
How Much Term Cover Do You Need?
Common rule of thumb: 10-15x your annual income.
Better approach — income replacement method:
Calculate annual family expenses if you were not there.
Multiply by the number of years until your dependents are financially independent.
Add outstanding loans (home loan, car loan).
Subtract existing savings and investments.
Example: Annual expenses Rs 6 lakh, 20 years until dependents independent, home loan Rs 40 lakh outstanding, savings Rs 15 lakh:
= (6 lakh × 20) + 40 lakh - 15 lakh = Rs 1.45 crore coverage needed.
Choosing a Term Insurance Policy
Claim settlement ratio: IRDAI annual report lists claim settlement ratios for all insurers. Above 98% is excellent. Below 95% is concerning.
Solvency ratio: Financial strength of insurer. Minimum required by IRDAI: 1.5. Higher is better.
Premium payment term: Choose regular pay (throughout policy) over limited pay unless you have a specific financial reason.
Policy term: Cover should last until you are financially independent — typically age 65-70.
Riders: Critical illness rider and accidental disability rider are worth adding. Waiver of premium rider is useful.
Frequently asked questions
What is the difference between term insurance and life insurance?
Term insurance is pure death protection — it pays only if you die during the term. Whole life and endowment policies combine insurance with savings/investment components. Term insurance is significantly cheaper for the same death benefit.
How much term insurance should I buy?
A common starting point is 10-15 times your annual income. A more accurate calculation: annual family expenses × years until dependents are independent + outstanding loans - existing savings.