What is Term Insurance and How it Works?

5 mins read
by Angel One
Term insurance is a type of life insurance that offers guaranteed financial benefits in case of the policyholder’s demise during the policy term. Term insurance coverage is also affordable.

Life insurance is one of the most essential financial products that you need to add to your portfolio. It helps protect your loved ones financially in case something unexpected happens to you. However, if you’re in the market shopping for life insurance, you may be overwhelmed by the different types of life cover options available today. In case you do not have any life insurance plan yet, it may be a good idea to begin with term insurance coverage.

What is Term Insurance?

Term insurance is a type of life insurance that offers coverage for a specific period known as the policy term. The cover is offered on the life of the policyholder over this period. In return for the term insurance coverage provided, the policyholder pays premiums to the insurance provider. 

If the policyholder passes away during the policy term, the insurance provider pays death benefits to the nominee mentioned in the policy. This financial benefit acts as a safety net for the surviving family members and helps them meet their everyday expenses even after the policyholder’s demise. It also allows them to pursue their life goals as planned. 

However, if the policyholder survives the policy term, then no payouts are made. This is because a term life insurance plan is a pure life insurance cover that only offers death benefits. As a result, the premiums for term insurance are typically lower than the costs of other types of life insurance. 

How Does Term Insurance Coverage Work?

To better understand how term insurance coverage works, let’s discuss a basic example. Say a policyholder aged 25 years decides to purchase a term plan offering a cover of ₹1 crore. He is still young and has no previous individual or family medical issues. So, the premium that life insurance providers charge for this term life insurance policy will typically be quite low — amounting to a few thousand rupees annually. 

Now, let’s say the policyholder has chosen a policy term of 40 years. This means that he continues to enjoy term insurance coverage till he attains 65 years of age, provided he pays the premiums due on time. Over the course of his life, he gets married and his family grows to include two children as well.

At the age of 50, he passes away unexpectedly, leaving his family without a steady source of income. To meet this sudden financial disadvantage, the surviving family members can rely on the death benefits paid out under the term plan. His spouse, who is the nominee mentioned in the term life insurance plan, needs to file a claim with the insurance provider to receive the sum assured under the policy. 

The Key Benefits of Term Insurance

Now that you are aware of what term insurance coverage is and how it works, let’s take a closer look at the main advantages of term insurance plans. Here are the top reasons to consider buying this type of pure life insurance.

  • Financial Protection for Your Family

If you are the primary earning member or the sole breadwinner in your family, your loved ones may depend on you either partially or completely for their financial requirements. In case something unexpected happens to you, they will be left without any financial cushion to meet their basic requirements. Term life insurance coverage ensures adequate financial protection for your family. 

  • Large Sum Assured at Affordable Premiums

Another key benefit of this type of life insurance is its affordability. You can purchase a term insurance coverage worth crores of rupees at premiums as low as a few thousand rupees each year. If you are younger when you buy your term plan, your premiums are likely to be lower as well. So, you can tap into these benefits to give your loved ones significant financial protection at extremely affordable premiums. 

  • Customisable Policy Options

Many features of the typical term life insurance plan in India are highly customisable. You can choose the sum assured under the policy, the policy term and the frequency of premium payments (monthly, quarterly, semi-annual or annual). You can even choose to pay your premium as a lump sum amount upfront at the time of purchase. What’s more, you can also decide between regular premium and limited premium payment options. 

  • Additional Benefits with Add-On Riders

Term insurance riders are additional covers that you can purchase along with the base policy — for an added rider premium. They offer extra financial protection in the case of specific contingencies like a critical illness diagnosis or an accident. These add-on riders increase the financial benefits you obtain from your term life insurance policy and offer you comprehensive protection in the face of various contingencies. 

  • Tax Benefits

The premiums you pay for your term life insurance plan are deductible up to ₹1.5 lakhs per year under Section 80C of the Income Tax Act, 1961. This brings down your total taxable income and reduces your tax liability. Furthermore, the death benefits paid out from a term plan are also exempt from tax under Section 10 (10D) of the Income Tax Act. So, your nominee will not have to pay any tax on the sum assured received. 

Factors to Keep in Mind Before Buying a Term Life Insurance Plan

Before you purchase term insurance coverage, you need to consider or weigh in on the following aspects: 

  • The amount of coverage required
  • The policy term
  • The add-on riders you wish to include
  • The reputation and claim settlement ratio of the insurer
  • The features of the policy


To sum it up, a term life insurance policy is one of the most fundamental financial safety nets that you need. It offers significant coverage at extremely affordable premiums. What’s more, the sooner you buy your term life cover, the lower your premiums are likely to be. So, evaluate your financial needs, identify the amount of life cover you need and purchase your term life insurance plan when you are young and healthy.  


How does a term life insurance policy differ from an endowment policy?

A term insurance plan is a pure life cover that offers only death benefits in the case of the policyholder’s demise during the policy term. You do not receive any financial payouts if you survive the policy term. An endowment policy, however, offers guaranteed maturity benefits if you outlive the policy term.

Will I receive any financial payouts under my term insurance coverage at the end of the maturity period?

A term life insurance policy does not offer any maturity benefits since it is a pure life cover. It only offers a guaranteed payout if the policyholder passes away during the policy term.

What factors affect the term insurance premium?

The premium for a term life insurance plan depends on various factors like the age and gender of the applicant, their medical history, the sum assured under the plan, the policy term and the addition of life insurance riders, if any.

Will I receive my term insurance premiums at the end of the policy term?

The premiums paid for term insurance coverage are not typically returned to the policyholder at the end of the policy term. However, you get this benefit if you opt for the Return of Premium (ROP) rider.

Can I add riders to my term life insurance plan?

Yes, you can add many different riders to your term life insurance plan. They include the accidental death benefit rider, critical illness rider, income benefit rider and waiver of premium rider, among other options.