What is a Term Insurance? Types, Features & How It Works (2026)

Term insurance is one of the simplest and most effective ways to protect your family’s financial future. It offers a high life cover at an affordable premium and ensures your dependents receive financial support if something happens to you during the policy term.

So, exactly “what is a term insurance”? It is a pure protection plan designed only to secure your family, not to generate returns.

Let’s learn the basics!

What is Term Insurance? 

Term insurance is a type of life insurance that offers financial protection for a specific “term” (like 10, 20, or 30 years). If the policyholder (you) passes away during this term, your family (nominee) gets a lump sum amount, called the sum assured.

It is called a pure protection plan because it provides only life cover; there are no maturity benefits if you survive the policy term. This is why term plans have low premiums and high coverage, making them one of the most affordable ways to safeguard your family.

You can also add extra features (called riders) like critical illness cover, accidental death cover, and more.

How Does Term Insurance Work?

Here’s a step-by-step breakdown of how a term plan works:

Step 1. Choose Your Coverage (Sum Assured)

You start by deciding how much life cover your family will need. Your income, loans, lifestyle costs, and future goals help determine the right amount.

Step 2. Select the Policy Term

The policy term is the number of years the insurance will stay active, such as 10, 20, 30, or even up to 99 years. Your family gets the payout only if the insured event happens during this period.

Step 3. Pick the Premium Paying Term

This is the period during which you will pay premiums. Options include:

• Regular Pay: Pay throughout the policy term
• Limited Pay: Pay for a shorter duration (e.g., 10 years) but stay covered longer
• Single Pay: One-time premium payment

Step 4. Pay Premiums on Time

Premiums can be paid monthly, quarterly, yearly, or as a lump sum. Timely payments keep the policy active and ensure your family stays protected.

Step 5. Nominate a Family Member

You must select a nominee: your spouse, child, or parent, who will receive the sum assured if you pass away during the policy term.

Step 6. Claim Process in Case of Death

If the policyholder dies during the term:

• The nominee files a claim with the required documents
• The insurer verifies details
• The sum assured is paid out as a lump sum or in instalments (depending on the plan)

7. What If You Survive the Term?

• Regular term plans: No payout (pure protection)
• Return of Premium (ROP) plans: All premiums paid are returned (except GST)

Eligibility Criteria for Term Insurance in India

Most insurers follow similar eligibility criteria:

• Age: Typically 18 to 65 years (some plans extend up to 70).
• Income: Proof of stable income to justify the required coverage.
• Health Condition: Medical history, lifestyle habits, and past illnesses may affect approval.
• Employment Type: Salaried, self-employed, or business owners must show stable income sources.

Documents Required to Buy Term Insurance

To buy a term plan, you usually need: 

• Identity Proof: Aadhaar, PAN card, passport, or voter ID
• Address Proof: Utility bill, Aadhaar, passport, or rental agreement
• Income Proof: Salary slips, Form 16, ITR, or bank statements
• Age Proof: PAN card, Aadhaar, or birth certificate
• KYC Completion: Mandatory under IRDAI norms

What are the Types of Term Insurance Plans in India?

There are different kinds of term plans available in the market today. Each one is designed to meet specific goals:

1. Level Term Plan: The sum assured stays the same throughout the policy term. It is affordable.

2. Increasing Term Plan: In this plan, the sum assured increases every year. It helps your policy keep up with rising costs (inflation). For example, the cover might go up by 5% or 10% each year.

3. Decreasing Term Plan: Here, the sum assured goes down every year. This type is suitable when your financial responsibilities (like a home loan or an education loan) decrease over time.

4. Return of Premium Term Plan: If you survive the policy term, all the premiums you paid are returned to you. These plans cost more but offer some return at the end.

5. Convertible Term Plan: You start with a term plan and later convert it into a different type of life insurance (like endowment or whole life policy) without any medical tests.

6. TROP (Term Return of Premium): Here, you can get the premiums paid if you survive, but they are more expensive and offer no extra benefits.

What are the Benefits of Term Insurance in India

Term insurance is one of the most affordable and effective ways to secure your family’s financial future. The following are the key benefits of term insurance:

1. High Coverage, Low Premium: Term plans offer large life cover (like ₹1 crore) at a low premium because they provide pure protection.

2. Financial Support for Your Family: If the policyholder dies during the policy term, the nominee receives the full sum assured to manage expenses, repay loans, and maintain stability.

3. Tax Benefits: Premiums qualify for deductions under Section 80C, and death benefits are tax-free under Section 10(10D).

4. Add Riders for Extra Protection: You can enhance your cover with riders such as critical illness, accidental death benefit, or waiver of premium.

5. Flexible Payment and Policy Options: Choose your policy term, premium paying term (regular, limited, single), and payment frequency based on your convenience.

6. Easy Online Purchase: Digital term plans allow quick comparison, transparent pricing, and hassle-free buying with lower premiums.

7. Pure Life Cover: No investment or savings element; simple, transparent protection focused on your family’s security.

Term Plan vs Life Insurance: What’s the Difference?

Term insurance and life insurance are often confused, but they work very differently. Here is the simplest way to understand both:

Term Insurance (Pure Protection Plan)

• Provides life cover for a fixed period (policy term).
• Pays the sum assured only on death during the term.
• No maturity or survival benefit (except in ROP plans).
• Lowest premiums and highest coverage.
• Best for the financial protection of dependents.

Life Insurance (Protection + Savings)

• Offers life cover along with savings or investment benefits.
• Pays on death or maturity, whichever happens first.
• Higher premiums due to savings/investment component.
• Includes plans like endowment, ULIP, money-back, and whole life.

Life Insurance vs. Term Plan: Quick Comparison 

Feature	Term Insurance	Life Insurance
Purpose	Pure protection	Protection + savings/investment
Premium	Low	High
Payout	Only on death during the term	On death OR maturity
Coverage	High (₹1 crore+)	Moderate
Cash Value	None	Yes, grows over time
Best For	Income protection	Long-term savings + protection

Which One Should You Choose?

• Choose Term Insurance if you want maximum cover at minimum cost.
• Choose Life Insurance if you want returns + protection and can afford higher premiums.

How to Choose the Right Term Insurance Plan

Selecting the right term insurance plan ensures your family gets adequate financial protection when needed.  Use this simple checklist before buying a policy:

1. Choose the Right Coverage Amount

A practical rule is to opt for 10–15 times your annual income. This helps your family manage long-term expenses, EMIs, children’s education, and lifestyle needs.

2. Check the Claim Settlement Ratio (CSR)

A CSR above 97% indicates that the insurer settles claims consistently and reliably. It is one of the most important evaluation criteria.

3. Review the Solvency Ratio

A solvency ratio of 1.5 or higher (as mandated by IRDAI) shows the insurer has strong financial capacity to honour future claims.

4. Compare Premium Paying Options

Choose from Regular Pay, Limited Pay, or Single Pay depending on your income flow. For example, Limited Pay helps finish premiums early while keeping coverage active for the full term.

5. Select the Right Riders

• Add riders only if they align with your needs. Common options include:
• Critical illness rider
• Accidental death benefit rider
• Waiver of premium rider
  

6. Pick the Correct Policy Term

Ideally, your term plan should cover you until age 60–65, closely matching your earning years.

7. Compare Online Plans

Online term insurance plans often offer lower premiums, transparent features, and faster purchasing due to reduced agent costs.

Conclusion

Every earning person, whether salaried or self-employed, should think of term insurance as a basic financial tool. It ensures that even in your absence, your family doesn’t have to struggle.

It is affordable, flexible, and can be customised as per your needs. Once your protection needs are in place, the next step is to grow your wealth systematically using the right tools and platforms. Choosing the best investment app can help you invest efficiently, track your goals, and build long-term financial security with confidence.

Term Insurance Meaning: FAQs