Term insurance: why it matters, with a worked example
Rules for FY 2026-27 · Checked 24 October 2026
Term insurance pays your family a lump sum if you die during the policy term, and nothing if you outlive it. That is why it is cheap: a healthy non-smoker of 30 often pays ₹10,000 to ₹16,000 a year for ₹1 crore of cover. If anyone depends on your income, or you have a loan, buy cover of about 10 to 15 times your yearly income, to around age 60.
What term insurance is
You pay a yearly (or monthly) premium for a fixed term, say until you are 60. If you die in that time, the insurer pays the sum assured to your nominee. If you do not, the policy simply ends. There is no maturity value, no bonus and no investment inside it, which is what keeps it so cheap.
- The premium is fixed for the whole term when you buy, so buying young locks in a low price.
- The payout to your family is tax-free, and premiums carry no GST since 22 September 2025.
- You can hold more than one term policy and your family can claim on all of them.
Why it matters: Rohan’s family
Rohan is 32 and earns ₹12 lakh a year. His wife Meera looks after their 3-year-old daughter. They have a ₹30 lakh home loan and ₹5 lakh of savings, and the household spends about ₹40,000 a month apart from Rohan’s own costs and the EMI. His office gives him life cover of three times his pay.
If Rohan died tomorrow with no cover of his own, Meera would have ₹5 lakh, a ₹30 lakh loan, no income, and the office cover only if he still worked there. This is what the family would really need:
| Need | Amount |
|---|---|
| Household spending for 25 years, rising 6% a year, with the payout earning 7% | ₹1.07 crore |
| Clear the home loan | ₹30 lakh |
| Daughter’s education and marriage | ₹25 lakh |
| Total need | ₹1.62 crore |
| Less savings | − ₹5 lakh |
| Cover needed | ₹1.57 crore |
So Rohan should buy about ₹1.75 crore of term cover running to age 60 at least. For a premium of perhaps ₹20,000 to ₹30,000 a year, his family keeps the house, the daughter’s plans and its way of life.
The office cover is not counted. It ends if Rohan changes jobs, is laid off or starts a business, which is often when a family is most stretched.
Work out your own cover
Term insurance or an endowment plan?
Endowment, money-back and similar plans mix insurance with saving. They give back money at the end, but the cover is small and the return is low. Compare three ways of spending the same ₹50,000 a year for 20 years:
| Life cover | Value after 20 years | |
|---|---|---|
| Endowment plan, growing 5% a year | ₹5 lakh | ₹17.4 lakh |
| Term plan (₹13,000 a year) + ₹37,000 a year in PPF at 7.1% | ₹1 crore | ₹16.4 lakh, guaranteed and tax-free |
| Term plan + ₹3,083 a month in an equity SIP at 10% | ₹1 crore | ₹23.6 lakh, not guaranteed |
For about the same money, buying term and investing the rest gives your family 20 times the cover. The endowment figure assumes cover of 10 times the premium and a 5% return; the exact return is in your plan’s benefit illustration, and PPF’s rate is set every quarter.
How to buy term insurance well
- Buy early. The premium depends on your age and health on the day you buy, and stays the same for the whole term.
- Tell the insurer everything: smoking, alcohol, illnesses, other policies. In the first 3 years a claim can be refused for facts you hid. After 3 years the policy cannot be questioned on any ground.
- Run it until your family no longer needs your income, usually to 60 or 65.
- Choose a nominee, and tell your family the policy exists and where its papers are.
- Married men can buy the policy under the Married Women’s Property Act, so the money goes only to the wife and children and lenders cannot claim it.
- Look at each insurer’s claim settlement record in IRDAI’s annual report, not only the price.
- You have 30 days after receiving the policy to cancel it and get a refund (the free-look period).
Tax on term insurance
In the old regime, premiums count towards the ₹1.5 lakh limit under section 80C (section 123 of the Income-tax Act, 2025). The new regime gives no deduction. Either way, the money your family receives on a claim is tax-free.
Frequently asked questions
Do I need term insurance if I am single?
Not if no one depends on your income and you have no loans. But if you expect to marry or support your parents, buying young locks in a lower premium for decades.
Can a homemaker get term insurance?
Yes, though many insurers limit the cover, often linking it to the spouse’s cover. A homemaker’s work has a real cost to replace, so cover is worth having.
What happens if I miss a premium?
You get a grace period, usually 30 days for yearly payments and 15 days for monthly. After that the cover stops, and reviving it may need a fresh health check.
Should I add riders?
Accidental death, critical illness and waiver-of-premium riders can be useful and cost little. Keep the base cover large first; a rider is no substitute for it.
Is a return-of-premium term plan better?
It costs much more. Most people do better with a plain term plan and investing the difference.
Sources: IRDAI (insurance regulator), Income Tax Department, Council for Insurance Ombudsmen