What it is, and what it deliberately is not
You pay a premium for a fixed number of years. If you die within that period, the insurer pays your nominee the sum assured. If you survive it, you get nothing back and the policy ends.
That last clause is the entire reason term insurance works. Because none of your premium is being set aside to return to you, almost all of it buys cover — which is why a term plan provides a sum assured many times larger than a bundled policy for the same outlay.
“I get nothing back” is the objection that stops people buying it, and it is the same objection nobody raises about motor insurance. You do not expect your car premium back at year end. Term cover is the same product shape applied to a larger risk.
Who actually needs it
Term cover replaces income that other people depend on. So the question is not your age or your income — it is whether anyone's financial position would deteriorate if you died.
| Situation | Cover needed? |
|---|---|
| Earning, with a spouse, children or dependent parents | Yes — the central case |
| Home loan or other large debt with a co-borrower or guarantor | Yes — the debt outlives you |
| Non-earning spouse whose work would have to be replaced by paid help | Often yes, and usually overlooked |
| Single, no dependants, no debt | Generally no financial need |
| A child | No. A child's death is not a financial loss to insure against |
| Retired, no dependants, corpus sufficient | Generally no — the corpus has replaced the income |
Sizing the cover
Two accepted methods. Do both, and take the larger.
Income replacement. A common rule of thumb is ten to fifteen times annual income. It is quick and it ignores your actual obligations, so treat it as a sanity check rather than an answer.
The needs method is the one that produces a defensible number. Add up what the money must actually do:
- Outstanding debts, cleared in full — home loan, personal loans, any co-signed borrowing.
- Annual household running costs, multiplied by the years until dependants become self-supporting.
- Large future commitments — education, marriage — stated in future rupees, not today's.
- Minus existing liquid assets and any employer-provided cover.
Two adjustments that most calculations miss. Inflate the running costs — a household needing ₹6 lakh a year today will need considerably more in fifteen years, and the corpus has to fund the later years too. And subtract employer cover cautiously: it ends when the job does, which is exactly when you would least want to be re-underwritten.
Choosing the term
The right term is until your dependants no longer depend on you — typically until the youngest child is financially independent, or until the home loan is repaid, whichever is later.
Cover extending decades beyond that point is being bought for a period in which your death would cause no financial hardship, and each of those extra years is paid for. Policies running to age 85 or 99 are usually sold on the framing that the family “gets something eventually” — which converts protection back into an expensive savings product.
The opposite error costs more. A term that ends while dependants still rely on you leaves you uninsured at an older age, when fresh cover is more expensive and any health condition acquired in the meantime may make it unavailable at all.
Riders worth considering
Riders are add-ons to the base policy. Most are not worth the premium; three frequently are.
| Rider | What it does | Worth it when |
|---|---|---|
| Waiver of premium | Future premiums are waived if you become disabled or critically ill; cover continues | Almost always — it protects the policy at exactly the moment paying for it becomes hardest |
| Accidental death benefit | Pays an additional amount if death is accidental | Cheap, but consider whether you need more cover generally rather than more cover for one cause |
| Disability / critical illness | Pays on diagnosis or on permanent disability | Genuinely valuable, since disability removes income and adds cost — but read the definitions closely |
On critical illness riders specifically: payment depends on the condition meeting the policy's exact written definition, not on your doctor calling it by that name. Definitions specify severity thresholds and survival periods. This is the section to read before buying, not after diagnosis.
The claim settlement ratio is not the metric you think
Every comparison of term plans leads with the claim settlement ratio — the share of claims an insurer paid. It is the wrong thing to optimise, for two reasons.
The figures cluster. Most established insurers sit in a narrow band at the top. Choosing between two insurers a fraction of a percent apart is optimising noise.
It is an average across all claims, not a prediction about yours. It aggregates every policy an insurer wrote, including ones where the proposal form was filled in carelessly. It tells you very little about whether your claim will be paid.
Here is what actually determines that, and it is almost entirely within your control: whether you disclosed everything truthfully on the proposal form.
The dominant cause of rejected life claims is non-disclosure — an existing condition, a habit such as smoking, a family history, or income overstated to justify a larger sum assured. Insurers investigate early claims closely, and a material omission discovered then is grounds for repudiation. The policyholder is usually dead, so nobody can explain what was meant.
Disclose everything, including things you think will raise the premium. A higher premium on an honest proposal is enormously cheaper than a rejected claim on a convenient one. If a health condition or a habit means a loading, accept the loading — you are buying certainty that the policy will pay, which is the only thing you were buying at all.
Indian law also limits how far back an insurer can reopen a policy on grounds other than fraud after it has run for a period. The protection is real and it is not a reason to be careless — verify the current position rather than relying on a summary.
Where it goes wrong
- Buying too little because the premium felt like the budget. Cover should be sized to the loss, not to a comfortable monthly figure.
- Not disclosing fully. The single largest controllable risk to your family actually receiving the money.
- Relying only on employer cover. It ends with the job, and is usually a small multiple of salary.
- No nominee, or a stale one. An unnamed or out-of-date nominee turns a straightforward payout into a legal process at the worst possible time.
- Nobody knows the policy exists. A claim is only made if the family knows to make it. The policy details belong in a documents list somebody can find.
- Letting it lapse. Cover ceases; reinstating means fresh underwriting at an older age.
- Buying in March for the deduction. Decisions made against a deadline are how people end up with the wrong product at the wrong size.
What the separation is worth
The argument for buying pure cover and investing the difference is arithmetic, and it is worth running rather than accepting.
Take the premium of a bundled policy, subtract the premium for term cover of the same or larger sum assured, and treat the difference as a monthly contribution. FNOTrader's Mutual Funds app runs exactly that against real NAV history — around 34 million NAV rows — reporting XIRR, final value and the drawdown along the way, so the comparison is against evidence rather than an illustration.
FNOTrader does not sell insurance and does not recommend policies or insurers.
Common questions
What is term insurance?
Life cover for a fixed period. If you die during the term, your nominee receives the sum assured; if you survive it, nothing is paid and the policy ends. Because no part of the premium is set aside to return to you, almost all of it buys cover — which is why the sum assured is so much larger per rupee.
How much term insurance should I buy?
Add outstanding debts, annual household costs multiplied by the years until dependants are independent, and large future commitments stated in future rupees — then subtract existing liquid assets and employer cover. Cross-check against ten to fifteen times annual income, and take the larger figure.
How long should the term be?
Until your dependants no longer depend on you — usually until the youngest child is financially independent or the home loan is repaid, whichever is later. Cover running to age 85 or 99 is paying for decades in which your death would cause no financial hardship.
Is the claim settlement ratio important when choosing an insurer?
Less than it appears. Most established insurers cluster in a narrow band, so small differences are noise, and the figure is an average across all claims rather than a prediction about yours. What actually decides your claim is whether you disclosed everything truthfully.
Why are term insurance claims rejected?
Overwhelmingly because of non-disclosure at the proposal stage — an existing condition, smoking, family history, or overstated income. Insurers investigate early claims closely, and a material omission found then is grounds for repudiation, with the policyholder no longer around to explain.
Should I disclose a health condition if it raises my premium?
Yes. A loading on an honest proposal is far cheaper than a rejected claim on a convenient one. Accepting the higher premium is buying certainty that the policy will pay, which is the only thing being bought in the first place.
Which term insurance riders are worth buying?
Waiver of premium is almost always worth it, since it keeps cover alive at the moment paying for it becomes hardest. Disability and critical illness riders are valuable but depend entirely on the policy's written definitions, which should be read before buying rather than after diagnosis.
Is employer-provided life cover enough?
Rarely. It is usually a small multiple of salary and it ends when the job does — which is exactly when you would least want to seek fresh cover at an older age with any newly acquired health condition.
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