Understanding How Term Life Insurance Policy Works

Life is unpredictable, and you can never be sure of the future. However, there are several ways to ensure that your loved ones are well-supported financially even in your absence. Here’s where term insurance plans come into play.

These insurance plans can be availed at much cheaper rates than life insurance. Therefore, you can secure your family’s future needs without compromising on your regular budget. To understand how term insurance works, you must know its inclusions and exclusions. Continue reading to learn more.

Determine Your Needs

First, you must assess your family's needs and decide on a financial goal you want to achieve from the term insurance. It is a significant commitment, so you must be careful about the amount you choose.

Ensure the benefits you want them to receive are adequately fulfilled while maintaining your monthly expenses. Ideally, it should cover expenses like childcare, education, lifestyle, etc. and is more than 10 to 20 times your family’s net income.

Buy the Term Policy

After you have assessed the amount, choose and buy the term plan. First, set the term limit for your coverage. This also depends on your current age. The lower the age, the more years you get on the coverage.

The limit varies for different insurers based on the plan they choose, along with factors like – lifestyle, pre-health conditions, smoking or other habits. After the term and amount are finalised, you are ready to make the purchase.

Pay the Premiums

To keep your insurance policy active, you have to pay the premiums regularly. However, you can decide the frequency of these payments at your convenience. They can be monthly, quarterly, half-yearly or annually.

Besides, you can also pay in a lump sum once instead of making regular payments. The amount will depend on the sum assured, age, and gender and may alter depending on your lifestyle, health, medical history, smoking or other substance use etc.

Get the Benefits

1. Level Term Plans

This is the most basic type of term insurance, where your premium amount is fixed throughout the tenure. The benefit will come as the amount assured to the nominee in case of your demise within the set period. Furthermore, your insurance provider will decide the premium amount based on your income, health conditions, age, and other factors.

• How Level Term Plans Work: First, decide on the coverage amount, policy term, and payout option for your level-term insurance. Then, pay your premiums regularly (monthly / bi-annually / annually or as a lump sum amount). Consequently, in case of an unfortunate occurrence of death, your nominee will receive the assured amount in the form of instalments or a total amount. However if you survive past the maturity period, your nominee will not be eligible for the benefits.

• Maturity Period: The maturity period of level life insurance can be 10, 20 or 30 years, with a maturity age of up to 85 years. This type is most favourable for those who want a secure regular income for their nominees.

2. Term Insurance With Premium Return Benefits (TROP)

TROP is a type of term plan that comes with maturity benefits. This means that even if you survive the term limit of the plan, you will only receive the amount paid by you until then. However, in case of death, the nominee will receive the death benefits like any other term insurance plan.

• How Term Insurance With Premium Return Works: If you opt for a TROP plan, your nominees will be entitled to receiving a death benefit in case of your sudden demise. In addition, you will also receive a 100% of the paid premiums, known as survival benefit, in case you outlive the term.

• Maturity Period: The maturity age for these plans could go up to 75 years. However, it depends on the insurer you choose. After selecting your policy term and coverage, you can pay the premiums in a similar manner as mentioned above.

3. Increasing Term Plans

As the name suggests, with increasing term plans, you can increase the assured coverage amount with time, with negligible to no increase in the premium rates. It helps your family cope with the increased expenses over the years, especially in times of inflation.

• How Increasing Term Plans Work: After you select the desired plan, the increase in the assured amount will depend on the rate of increase offered by the insurer. However, there is a maximum limit set for every insurer, which you must assess before choosing a plan.

• Maturity Period: The maturity period for this plan generally varies between 25-35 years. This policy will best suit you if you expect an increase in responsibilities in the future. It will help you cope with the added expenses while beating economic inflation

4. Decreasing Term Plans

In this type of plan, the assured amount gets reduced with time at a fixed rate. Generally, you can opt for this option if you have financial debt like loans, mortgages, etc.

• How Decreasing Term Plans Work: The operational structures of increasing and decreasing term plans are similar, with one exception. In the latter's case, the assured amount is reduced with time, even though you pay a relatively fixed premium instalment. However, the premium rate for this plan is significantly low.

• Maturity Period: The maturity period for decreasing term plans depends on the insurer. However, the duration to maturity usually varies between 1 and 30 years. It is best suited for those who have a financial obligation to clear off rather than their own expenses.

5. Convertible Term plans

A convertible term plan does not come with separate exclusive features. It is a regular term insurance plan that offers you the benefit of conversion. This means you can convert the term insurance plan from one type to another within the tenure.

• How Convertible Term Plans Work: When you opt for a convertible plan, you will have the option to convert its type. However, conversion will not happen automatically. So, you have to make an official request to your provider. In case you do not opt for a conversion, the plan will continue as decided at the beginning. In addition, your premiums will remain the same and be decided at the start of the plan.

• Maturity Period: There is no fixed maturity period for convertible plans since they are changeable. For instance, suppose you have opted for a 10 year convertible term plan. So you will have the option to change it to a permanent coverage plan and enjoy the benefits till you pay the premiums.

A term insurance rider is an add-on cover that you can purchase along with your basic term insurance plan. There are some plans that come with these add-ons included. If not, you can add them to your base policy.

Term insurance riders can be of several types. Please read below to learn how they work.

Accidental Death Benefit Rider

This plan remains helpful in case there is a sudden death of the insured due to an accident. In such a case, the nominee will receive an added sum along with the regular assured amount. This additional amount is calculated keeping various factors in account, such as the original sum, plan, etc. and varies from one insurer to another.

However, the premium does not change during the policy term and is decided at the beginning. If the death of the insured person is not caused by accident, then the nominee will only receive the original sum assured.

Accelerated Death Benefit Rider

In critical cases, like terminal diseases of the policyholder, it causes a vast expense to the family. With the help of an accelerated death benefit rider, a portion of the total assured amount is paid earlier.

In this case, the advanced amount is specified while opting for the plan.

Accidental Disability Benefit Rider

Accidental disability benefit rider is an add-on plan that offers financial protection if there is an unfortunate incident of an accident causing complete or partial disability to the policyholder.

In this case, the disabled individual will receive a certain percentage of the assured amount for about 5 to 10 years after the accident as income. This is generally coupled with the accidental death benefit rider.

Critical Illness Benefit Rider

This rider is beneficial in case there are a lot of expenses involved in a critical illness diagnosis. In that case, the insurer will pay a substantial amount for the diagnoses as mentioned in their policy. It generally covers cancer, heart attack, paralysis, stroke, kidney failure, major organ transplant, etc.

Moreover, this plan can be terminated or continued post-diagnosis based on the policy terms and conditions.

Waiver of Premium Rider

The waiver of premium rider waves off your future premiums if you are unable to pay them due to disability or lack of income. This will ensure that all your premiums are up-to-date till the end of the policy term.

If you do not have this rider, your policy may expire as soon as you are unable to pay your premiums due to injury or unemployment. Consequently, you will not be eligible for a death benefit.

Income Benefit Rider

You can add this rider by paying an extra amount while buying a term insurance policy. This is particularly helpful if you want your beneficiaries to secure an additional income amount regularly along with the standard death benefit amount.

In addition, the amount your family will receive is pre-decided and is usually equivalent to the insured person’s monthly income. This rider offer can extend up to 5-10 years, depending on the insurance company and your chosen scheme.

Accidental Death

Even though accidental death is covered by insurance, it also heavily depends on the circumstances. Most insurers carry out investigations to ensure that the policyholder met with a genuine accident before proceeding with the death benefit claim.

Furthermore, accidents caused by self-imposed risks by the life insured, such as extreme sports, can also result in rejected death benefit claims.

Suicide

In case the policyholder commits suicide within a year of buying the policy, their dependents will not receive any death benefit.

Similarly, in the case of group insurance, compensation will be rejected in case of suicide or self-harm. Nevertheless, there are many insurers who return the premiums paid till date after deducting a few charges.

Death Due to Substance Abuse

Death due to war or drought

In case the insured individual passes away unexpectedly, their nominees can file a claim in three simple steps to secure the death benefit.

Step 1: Inform the insurer about the situation and notify them about the claim. This can be done online or offline or by directly visiting their office, depending on the company.

Step 2: Submit the necessary documents, such as the original insurance policy document, the policyholder’s death certificate, proof towards the claim, medical records, etc., depending on what your insurer wants. You may also have to show a few additional documents to verify your claim.

Step 3: The final step of the claim process includes claim settlement and payout. After the insurer has received your documents and claim, they will verify it before making the settlement decision. Based on it, your application can either get approved or rejected.

However, if further investigation is required, the insurer has to carry it out within six months, as per IRDAI rules.

Before opting for any term insurance plan, there are a few things you must keep into account to protect your loved ones from unnecessary struggle during hard times. For instance,

• Lapse Policy: This results from the inability to pay the premium amount within the due date or grace period. The beneficiary will not receive any coverage or death benefit if the policy lapses. However, most insurers also offer a lapse revival feature, which allows you to reinstate the policy without starting anew. Therefore, you must choose your insurer wisely after checking the features they offer.
• Surrendering a Term Policy: You can surrender a policy during the policy term if you do not feel it necessary anymore or have other financial commitments. In this case, you have to make an appeal to your insurer, who will then calculate the surrender value. Surrender value includes the total premium you paid to date minus a few charges. Therefore, you can surrender a policy anytime you want, but it will cost you.

The points demonstrated above explain how term insurance works. However, keep in mind that these policies are period specific and do not provide any offer if the term expires, unlike whole life insurance. Instead, they strictly offer financial protection to the nominees either at intervals or as a lump sum.

Nonetheless, with proper financial assessment, additional riders and features offered by insurers, you can calculate a policy term that will best serve your purpose at affordable premiums and protect your family from monetary crisis.