Buying a term insurance plan? Here are key things to know before you decide

A term insurance plan provides life cover for a fixed period, paying out to the nominee if the policyholder dies during the policy term. Such a plan's coverage is defined by the sum assured, the tenure and policy conditions set by the insurer.

Some of the key features of a term insurance plan, such as premium payments, exclusions, claim settlement terms, and policy duration, are specified at the time of purchase. Insurers include these details in policy documents, which determine eligibility, coverage limits and the circumstances under which the nominee can process claims.

Here's a detailed breakdown of factors to consider when purchasing a plan, how to decide on the right sum assured, some common reasons for rejections and other crucial details.

What to consider while choosing a term insurance plan?

When choosing a term insurance plan, the primary focus should be on the insurer’s credibility and the plan's flexibility, according to Varun Agarwal, Head of Term Insurance at Policybazaar. According to the expert, a customer should prioritise the following features:

• Claim Settlement Ratio (CSR): Indicates the percentage of claims an insurer pays out relative to the total number of claims received in a financial year.
• Solvency ratio: Reflects the insurer’s financial strength and ability to meet long-term obligations.
• Critical features: Availability of crucial riders such as accidental death or critical illness benefits, along with value-added health benefits.
• Premium flexibility: Option to delay premium payments during periods of financial difficulty.
• Claim process: A seamless, paperless claim process that ensures your nominees aren't burdened during a crisis.

The simplest approach to determining the right sum assured is the income-replacement method. Under this approach, a cover of at least 10 to 15 times the individual's annual income is typically considered the standard benchmark, Agarwal said.

“The goal is to ensure that the payout is large enough to replace your earnings, clear any existing liabilities and maintain your family’s current lifestyle without compromise,” he told LiveMint, adding that the coverage should act as a financial safety net that scales with the policyholder's age, income and the number of dependents relying on them.

According to Agarwal, customers must also consider buying a term plan with three essential add-ons to strengthen their coverage. These riders include the CI Rider, which provides a lump sum payout if diagnosed with major conditions such as cancer, stroke or heart ailments. Another important add-on is accidental death benefit, along with a waiver of premium add-on that allows the policy to continue even if the customer can’t pay due to any disability or illness, he said.

⁠Is it cheaper to buy term insurance plans online?

Buying a term insurance plan online via aggregators is significantly cheaper than buying it offline. Agarwal said that online aggregators offer plans with premiums 7-11% lower. “Online platforms offer transparent, direct-to-consumer pricing along with digital discounts and easy comparison across multiple insurers," he said.

The ideal age to buy a term insurance plan is as early as possible, typically in the mid 20s to early 30s, when an individual is younger and healthier. Premiums are directly linked to age and health risk, so buying early helps lock in a lower premium for the entire policy term. “Even a delay of five years, such as buying at 35 instead of 30, can increase premiums by 25 to 40% depending on the insurer and health profile,” he added.

Additionally, premiums across the industry have increased by around 30-40% since 2020 due to higher mortality risk, Agarwal told LiveMint, adding that buying a plan early ensures lower premiums and secures coverage before any health conditions develop.

What are the most common reasons for claim rejection?

Non-disclosure or misrepresentation of information is one of the biggest causes of claim rejection. If a policyholder fails to disclose pre-existing illnesses such as diabetes and hypertension, or habits like smoking, alcohol or tobacco use, or provides incorrect details about high-risk jobs, their claims might get rejected because term insurance relies heavily on utmost good faith.

“Policy lapses due to non-payment of premium or death due to reasons excluded in the policy, like suicide within the first year (or specific waiting period) or death due to participation in hazardous activities, can lead to claim rejection,” he said.

Additionally, accurate disclosure of income and existing financial liabilities, such as loans, is essential to ensure appropriate coverage and avoid complications during claim settlement, the expert said.

What tax deductions are available on term insurance premiums and payouts?

Term insurance offers a dual tax advantage. Premiums qualify for deduction under Section 80C up to ₹1.5 lakh in the old tax regime.

Meanwhile, the death benefit received by nominees is fully tax-free under Section 10(10D). This tax-free payout is available under both old and new tax regimes.