How does Term Insurance work: A step-by-step guide

Term Insurance

Term insurance is not an investment in the traditional sense—it's a safety net. It ensures that your family is financially secure if something happens to you. It's simple, affordable, and designed purely for protection, not for returns or wealth accumulation. That's why it's one of the smartest financial decisions you can make—not for profit, but for peace of mind.

An agreement

A term insurance policy is essentially an agreement between the insured—or the policyholder—and the insurer. The insured person pays the insurer a premium. In return, the insurer agrees to pay a pre-decided sum assured to the insured's family in case of their untimely demise during the policy term.

The terms "policyholder" and "insured" are often used interchangeably but are not always the same.

Policyholder:

The policyholder is the individual who owns the insurance policy. This person pays the premiums and has the authority to make changes to the policy, such as adding riders or appointing nominees.

Insured:

The insured is the individual whose life is covered by the policy. In the event of their demise, the insurance company pays the sum assured to the nominee.

The nominee

Ashok explained that the payout goes to a nominee chosen by the policyholder. The nominee is listed in a form along with other personal details and preferences. It ensures that the payout is given to the right person or distributed among multiple people per the policyholder's wishes.

Details required

Ashok elaborated that the insurer collects the insured's personal and medical details, such as their name, age, profession, health status, and medical history. This information helps the insurer assess the risk and finalize the premium. People with good health and low-risk professions typically enjoy lower premiums, while those with medical conditions or high-risk jobs usually pay higher premiums. However, in many cases, premiums can be negotiated, especially when buying policies online.

Then, after the premium is decided, the policyholder needs to decide how they want to pay it—either as a lump sum or in installments, such as monthly or yearly payments. The mode of payment, whether online or offline, is also up to the policyholder. Additionally, as discussed earlier, appointing a nominee is an essential step in the process.

Some additional benefits

Policyholders can save on taxes under sections 80C, 80D, and 10(10D) of the Income-tax Act, 1961. Premiums paid qualify for deductions, and the death benefit received by nominees is tax-free, providing both financial protection and tax savings.

On top of that, you can enhance the policy with riders like critical illness cover, accidental death benefit, or premium waivers. These options provide additional payouts or ensure continued coverage during unexpected events, offering flexibility and improved financial security beyond the base policy.

Some term insurance policies even offer maturity benefits if the insured outlives the policy term. This feature returns the premiums paid, ensuring financial value even when no claim arises, making term plans a more appealing safety net.

To conclude

How term insurance works is simple: you pay regular premiums to an insurer, and in return, they promise to provide a significant sum assured to your family if you pass away during the policy term. However, term insurance is more than just a "safety net." They are also a comprehensive financial tool for protection and savings.

Remember, it's not about fear; it's about responsibility and ensuring your loved ones are protected, no matter what.