What Is Term Insurance Policy & How Does It Work?

Term insurance is a type of life insurance policy where the life of insurer will be covered for a higher sum assured value and in case of death of insurer, his/her nominee or family will get the lump-sum amount as death benefit.

You might be thinking, then what is the difference between term insurance & normal life insurance plans? In case of term insurance plans, the premium amount you are going to pay will not be repaid back to you at the end of policy term. Although now a days you will also find a term plan with maturity benefit. We will discuss on them in another article.

How Does Term Insurance Plan Works?

Let’s understand the term insurance definition by a simple example. If you buy a term insurance plan with 1 crore life cover and for which let’s say the premium amount is Rs 10,000 /year. Now if the policy term is 30 years, then you are going to pay 30 X 10,000 = 3,00,000 (3 lakh).

Here the amount you have paid till 30 years will not get returned after your survive till the end of policy term. And that’s where many people don’t like term insurance plan, without realizing the power of term insurance.

Is Buying A Term Plan Good Idea?

Now, let me tell you why term insurance is a profitable game even if you are not going to get the money back. The main reason is, just paying Rs 10,000 every year you are actually buying a financial security off 1 crore. Just imagine after paying 10 premiums, in case you die your family will get Rs 1 crore.

But you have spend only 1,00,000 in 10 years only. Even if you did not die till the policy end, you may lose 3 lakh money. But think whether the value of 3 lakh will be same after 30 years?

So, the benefit of term plans are the security you are buying by paying the insurance premium. Here the amount I have mentioned for 1 crore term plan is just an indicative amount. In real time, it may differ as per your eligibility and other factors.

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Comments (3)

  1. Saving is important now days.earning money and saving for old age is not easy.Thanx for Great Article about Insurance.Want to hear More Information Like This

    1. Yes, planning for retirement is not at all easy at the age of 30. One have to sit and think days to plan properly.
      But if you are really worried about your future, then retirement planning is quite easy.

  2. The decreasing term insurance plans are renewable term plans where the cover and the premium decrease over the tenure of the term policy. These plans are mostly used by banks and financial institutions who cover their risks against the mortgage or home loan given to their customer by bundling the term plan along with the loan. The term plan ensures the bank or financial institution will get its money back in case the worst comes to pass. Since the loan amount due decreases each year with payment of the EMIs,  A convertible term plan a saving cum insurance plan which allows the insured to switch later to an endowment policy or a whole life assurance plan. Some companies may offer this plan as a rider to a term plan which means that the individual pays for the term cover as well the rider to be given the option to be able to convert the term policy later to an endowment or any other such plan.