What it is
Term insurance is a type of life insurance that runs for a fixed period, the policy term. If the person insured dies during that term, the insurer pays a pre-agreed amount to the family. That amount is called the sum assured.
The Insurance Regulatory and Development Authority of India (IRDAI) describes life insurance as financial cover against events linked to human life, such as death, disability, accident or retirement. Its consumer site explains that these products give a definite sum if the insured person dies during the policy term, or becomes disabled because of an accident. Our term insurance glossary page covers the basic definition.
Which of these events a particular policy covers differs from product to product, so the policy document is the final word.
How it works
The idea starts with income. When a person dies or is disabled, the household loses the income that person would have earned in future years. IRDAI points out that a human life cannot be valued, but a sum can be worked out from that likely loss of income.
So the sum assured is not a price on a life. IRDAI calls it a "benefit": the amount guaranteed to be paid if the loss occurs.
In practice, the sequence is simple:
- You choose a cover amount and a policy term.
- The insurer issues the policy and records what it covers and what it does not.
- If the insured person dies during the term, the guaranteed sum is paid as the policy provides.
IRDAI frames two risks that life insurance addresses: dying too soon and living too long. Cover for the first risk is what a term policy is about. The second, living too long, relates to savings and income after retirement, which other kinds of life insurance products address.
Who needs life cover
According to IRDAI, anyone who has a family to support and earns an income needs life insurance. It adds that homemakers also need cover because of the economic value of their contribution to the family. Children can be considered for cover as well, given the future income potential at risk.
IRDAI lists several purposes for life cover:
- financial support for your immediate family if you die
- funding children’s education and other needs
- extra income if earnings fall because of serious illness or accident
- other financial contingencies and lifestyle needs
How much cover is needed
There is no single figure. IRDAI says the amount depends on how many dependants you have, the lifestyle you want to provide for your family, what your children’s education will cost, your investment needs and what you can afford.
The regulator suggests speaking to an insurance agent or broker to understand your needs and the right type of cover. Treat any such conversation as a way to compare options, not as a reason to rush.
What it means for you
Before you pay a premium, IRDAI’s general advice for life insurance buyers gives a short checklist:
- Check that the company selling the policy is registered with IRDAI.
- Buy through a genuine, licensed agent or broker, and ask to see their identity card or licence.
- Remember that you can also buy directly from the company.
- Read the policy brochure or prospectus carefully to learn what the policy covers and what it does not.
A useful way to start is to list who depends on your income and for what: household expenses, children’s education, other commitments. That list gives you something concrete to compare against any cover amount you are quoted.
Common mistakes to avoid
- Skipping the registration check. IRDAI’s first piece of advice is to confirm the insurer is registered with it.
- Buying from someone without a licence. Ask for the identity card or licence of an agent or broker.
- Not reading the brochure. The document sets out what is covered and what is not. Exclusions are easy to miss if you rely on a verbal summary.
- Choosing a cover amount without a reason. The regulator ties cover to dependants, lifestyle, education needs and affordability, so a number picked at random may not match your family’s situation.
- Assuming only the main earner needs cover. IRDAI notes that homemakers, and even children, can be considered for life insurance.
