| What is the purpose of term life insurance? Term life insurance is designed to offer financial protection to your loved ones by providing a death benefit if the policyholder passes away during the policy term. Its primary purpose is to replace income, pay off debts, and ensure financial stability for dependents. It is not intended for savings or investment, but rather for protection, making it an affordable and essential part of any financial plan. |
Term life insurance is a simple yet powerful financial product designed to protect your loved ones in case of an untimely death. Unlike investment-based plans, it focuses solely on offering financial security during a specified policy term. If the policyholder passes away during this period, the insurer pays a predetermined sum to the nominee. This ensures that your family can cover essential expenses, such as daily living costs, debts, or education, without disruption. In this blog, we answer the popular question, “What is the purpose of term life insurance?”.
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What is the Purpose of Term Life Insurance? : Blog Overview
1. What term life insurance is and how it works
2. What is the purpose of term life insurance
3. Who should consider getting it
4. Types of term insurance available
5. Key benefits of term life insurance
6. A comparison between term and whole life insurance
What is Term Life Insurance?
Before we answer “What is the purpose of term life insurance?” it’s crucial for you to understand what term life insurance is. Term insurance is one of the most straightforward forms of life insurance, designed solely to provide financial protection and not to generate investment returns. It ensures that if the policyholder passes away during the policy term, their nominee receives a sum assured known as the death benefit. This payout helps the family manage everyday expenses, repay debts, or maintain their standard of living in the absence of the primary earner.
Here’s what makes term life insurance unique:
1) Fixed premiums throughout the policy term
Once you buy a policy, the premium stays constant for the entire duration. This allows for predictable budgeting and long-term affordability.
2) Coverage exclusive to the policy term
The insurer pays the agreed-upon death benefit only if the policyholder passes away within the chosen term. If they outlive it, no benefit is paid (unless a Return of Premium option is selected).
3) Focused on protection
Term plans are protection-only products. If the policyholder survives the policy term, there is no payout, making it cost-effective but not suitable for those seeking investment returns. It’s important to note here that this is what makes term plans affordable and focused. They’re like a safety net, you hope never to use it, but are glad it’s there.
In essence, term life insurance provides pure financial protection, offering peace of mind that your loved ones will remain financially secure even if you’re no longer around. Now that you understand what term life insurance is, let’s explore why it exists and what its primary purpose is.
What is the Primary Purpose of Term Life Insurance?
The primary purpose of term life insurance is to provide a safety net that protects your family from financial hardship in your absence.
Here’s how term life insurance fulfills that purpose:
1) Act as an income replacement for the policyholder
If you’re the primary earner, your sudden absence can leave your family without financial support. Term insurance ensures they continue to receive funds to sustain their lifestyle.
2) Pays off liabilities like home loans or education fees
Outstanding debts like mortgages, personal home loans, or your child’s tuition can be cleared using the death benefit, so your loved ones aren’t burdened with repayments.
3) Covers daily living expenses
The payout can help cover essentials like groceries, utility bills, healthcare, and transportation, allowing your family to manage day-to-day costs without stress.
4) Secures long-term financial goals
From a child’s higher education to retirement planning for a spouse, term life insurance helps protect future aspirations, even if you’re not around to fulfill them.
In short, term life insurance provides vital financial continuity. Next, let’s look at how it works and what to expect during the policy term.
How Term Life Insurance Works?
Understanding how term life insurance functions is key to choosing the right plan. It’s a simple, contract-based agreement between you and the insurer: you pay regular premiums, and in return, the insurer provides financial protection to your family if something happens to you during the policy term.
Here’s how it works step-by-step:
1) Start by choosing a trusted insurer
The first step is to select a reliable term insurance provider with a strong claim settlement ratio, a high amount settlement ratio, a good customer service track record (characterized by low complaint volume), and flexible product offerings. Doing this ensures peace of mind and confidence in the coverage you’re purchasing.
2) Select a plan based on your needs.
After choosing your insurer, you’ll need to decide on a specific term plan. This involves:
- Policy Term: You can choose a duration that suits your financial goals, typically between 10 and 40 years.
- Coverage Amount (Sum Assured): This is the amount your nominee will receive if you pass away during the term. Choose a sum that can cover your family’s expenses, debts, and future goals.
- Premium Payment Term: Decide if you want to pay premiums regularly (monthly/annually), for a limited number of years, or in one lump sum.
3) Improved Protection with Add-on riders:
To make your policy more comprehensive, most insurers offer optional add-ons (riders) such as:
- Critical Illness: Lump sum benefit on diagnosis of listed illnesses.
- Waiver of Premium: Future premiums waived in case of disability or disease.
- Accidental Total and Permanent Disability: Coverage in the event of total and permanent disability.
These riders can be added for an additional cost but offer significant value.
4) Pay fixed premiums for the chosen term.
Once your plan is active, you’ll pay regular premiums (monthly, quarterly, or annually). These remain fixed for the entire policy duration, making it easier to budget over the long run.
5) If you pass away within the term, the nominee receives the full sum assured.
In the unfortunate event of your death during the policy period, the insurer pays the entire death benefit to your nominee. This lump sum can help cover living expenses, loan repayments, children's education, and other financial responsibilities.
6) No benefit is paid if you survive the term (unless it’s a Return of Premium plan)
Standard term plans do not offer maturity benefits. However, a Return of Premium option refunds all premiums (excluding charges) if you outlive the term. It’s crucial to note here that, traditionally, ROP plans are not recommended because of their low cost-benefit.
Term life insurance is designed to offer maximum protection at minimal cost, and with customizable features and riders, it can be tailored to meet your evolving life needs. By carefully choosing your insurer, plan structure, and coverage options, you can ensure robust financial security for your loved ones, no matter what life brings.
Let’s understand this better with an example:
Example: How Term Life Insurance Works in Real Life
Ravi, 32, is a software engineer and the sole breadwinner in his family. He chooses a ₹1 crore term life insurance policy for a 30-year term and pays an annual premium of ₹12,000.
For the next 30 years, Ravi pays this fixed premium regularly. He also added a Critical Illness rider, which earlier gave him a ₹10 lakh payout when he was diagnosed with a listed illness in the 10th year. This money helped with his treatment and recovery without disrupting the family's savings.
In the 18th year of the policy, Ravi tragically passed away due to a sudden illness. Because he was within the policy term, the insurer paid ₹1 crore to his wife, the nominee. This payout helps cover household expenses, his children's education, and clears an outstanding home loan, ensuring the family doesn’t face financial hardship.
Now, let’s say Ravi had survived the full 30-year term:
In a standard term plan, there would be no payout, which is expected, as this is a pure protection product. If Ravi had opted for a Return of Premium (ROP) variant, he would’ve received back his total premiums paid (around ₹3.6 lakhs), minus GST and charges. However, this would have resulted in a higher premium throughout the term, often not worth the trade-off.
Up next, let’s explore who should consider buying term life insurance and why.
Who Should Buy Term Life Insurance?
Term life insurance is ideal for individuals with financial dependents or long-term obligations. It provides a low-cost way to ensure your family is protected if you’re no longer around to support them. Whether you're early in your career or managing a household, this form of insurance can be a critical part of your financial strategy.
Here’s who should strongly consider buying a term plan:
1) Young professionals with dependents
If you're just starting your career and have parents or siblings relying on your income, term insurance offers high coverage at low premiums, perfect for early financial planning.
2) Married couples and new parents
Protect your spouse and children from financial uncertainty by ensuring they have the funds to maintain their lifestyle and cover future expenses like education or childcare.
3) Homeowners with outstanding loans
If you’ve taken a home loan or other long-term debt, a term plan can ensure those liabilities don’t become a burden to your family in your absence.
4) Anyone seeking high protection at low premiums
Term life insurance is one of the most affordable ways to obtain substantial coverage, making it suitable for anyone who wants peace of mind, protection for their investments, and a lifestyle that doesn't strain their budget.
If you fall into any of these categories, term life insurance could be one of the most thoughtful decisions you make. Now, let’s take a closer look at the different types of term life insurance plans available.
Types of Term Life Insurance
Term life insurance comes in several variants to suit different financial needs and life situations. While all types serve the core purpose of providing death benefit protection, they differ in how the coverage amount behaves over time.
Here are the most common types:
1) Level Term Insurance
This is the most basic and popular option. The sum assured and premiums remain fixed throughout the policy term, offering predictable protection and cost.
2) Decreasing Term Insurance
In this plan, the coverage amount reduces gradually over time, making it ideal for covering liabilities like home or personal loans that decrease as you repay them.
3) Increasing Term Insurance
Here, the coverage amount increases annually, usually to keep pace with inflation or growing responsibilities. It helps ensure your family’s protection value doesn’t diminish over time.
4) Return of Premium (TROP)
In this type of term plan, your premiums are returned to you if you survive your policy term. However, these plans come with significantly higher premiums, and the amount returned is after deducting taxes (such as GST). Additionally, there are no tangible returns or profits to be had here. You simply get your own money back without any interest.
| Ditto’s Take: Each type of term life insurance serves a specific purpose, but it's essential to choose wisely based on long-term needs. Decreasing Term Insurance is generally not recommended. Predicting your future liabilities is tricky, and in reality, your financial responsibilities often increase and not decrease over time. A fixed is usually more appropriate. Similarly, an increasing term insurance might sound appealing, but it’s frequently not worth the cost. You pay higher premiums in the early years, and the growth in coverage is typically limited to 5–10% annually, often capped at 100%, which may not adequately cover inflation or rising needs. On the other hand, Return of Premium plans might feel comforting, but they’re not cost-effective. You end up paying significantly more for the same sum assured, and the “returns” are merely a refund of your premiums, minus taxes, with no interest or growth. For most people, a simple Level Term Insurance plan with adequate coverage and an appropriate term (till 65-70 years) is the most efficient and affordable way to secure their family’s future. |
Next, let’s explore the key benefits of term life insurance and why it stands out among other insurance options.
Key Benefits of Term Life Insurance
One of the primary reasons people opt for term life insurance is that it provides maximum financial protection with minimal complexity. It's designed to deliver peace of mind at an affordable price, making it ideal for individuals at any stage of life.
Here are the key advantages:
1) Affordability: High coverage at low cost
Term plans are among the most cost-effective insurance options, allowing you to get extensive coverage amounts for relatively low premiums, especially if you buy early.
2) Simplicity: Easy to understand
Term life insurance is straightforward. There are no investment components or confusing terms, just a promise of a payout if the policyholder passes away during the term.
3) Customization: Optional riders for broader protection
You can enhance your base policy by adding riders such as critical illness coverage, accidental disability coverage, or a waiver of premium to suit your specific needs.
4) Tax Benefits: Under Sections 80C and 10(10D)
Premiums paid are eligible for deductions under Section 80C (of the old tax regime), and the death benefit is tax-free under Section 10(10D), subject to prevailing laws.
5) Flexibility: Choose lump sum or staggered payouts
Depending on your family’s financial habits, you can opt for a one-time payout or structured monthly income to help them manage funds more efficiently.
These benefits make term life insurance a crucial component of effective financial planning. Next, let’s see what happens if you outlive your term life policy and whether you still get something in return.
Best Term Plans in 2025
Note: For a premium comparison, we’ve taken the example of a 30-year-old salaried male, a non-smoker, living in Delhi, with a 35-year term insured for a sum of ₹1 crore.
| Insurance Plan | Premiums | Coverage and Riders |
|---|---|---|
| Axis Max Life Insurance Smart Term Plan Plus | First Year: ₹11,960.77* Second Year Onwards: ₹14,071 |
Accidental Death Benefit, Critical Illness Cover (64 illnesses), Regular or Smart Cover (1.5X coverage for first 15 years), Women's Perks (Lifeline Plus & Maternity Cover), Waiver of Premium on Disability or Critical Illness, Zero-Cost Exit Option, No Inflation-linked Top-Up |
| Bajaj Allianz Life eTouch II | First Year: ₹12,568* Second Year Onwards: ₹13,370 |
Accidental Death Benefits, Life Stage Benefit (increased coverage after marriage/childbirth), Critical Illness Rider (60 conditions), Waiver of Premium on Permanent Disability (accident-related), Zero Cost Option |
| ICICI Prudential iProtect Smart | First Year: ₹12,909* Second Year Onwards: ₹14,343 |
Accidental Death Benefits, Life Stage Benefit (increased coverage after milestones like marriage/childbirth), Terminal Illness Payout, Critical Illness Cover (34 illnesses), Zero Cost Option, Waiver of Premium on Permanent Disability (accident-related) |
| HDFC LIFE Click 2 Protect Super | First Year: ₹15,498.95* Second Year Onwards: ₹16,315 |
Accidental Death Benefits, Disability & Critical Illness Premium Waiver, Total Permanent Disability, Inflation-linked cover, Critical Illness Cover (60 illnesses, 90-day waiting period), Terminal Illness Benefit, Return of Premium Option. |
| TATA AIA Sampoorna Raksha Promise | First Year: ₹11,714* Second Year Onwards: ₹13,000 |
Accidental Death Benefit, Critical Illness Coverage (40 illnesses), Total Permanent Disability, Waiver of Premium on Critical Illness/Permanent Disability, Life Stage Benefit, Partial Terminal Illness Payout |
Disclaimer: The data is indicative as premiums are subject to periodic revision and vary with age, medical history, smoking/tobacco consumption habits. Please verify the latest premiums for accuracy.
What Happens If You Outlive the Policy?
A common question people ask while buying a term plan is, “What happens if I survive the policy term?” Unlike investment-linked insurance products or ULIPs, or endowment plans, term plans are designed purely for your protection, so the outcome depends on the type of plan you’ve chosen.
Here’s what you need to know:
1) No payout in standard term plans
If you live past the policy term, your coverage ends, and no money is paid out. This is because standard term insurance is not a savings product; it only pays out in the event of death during the term.
2) Return of Premium plans refund all premiums (excluding taxes/fees)
If you’ve opted for a Return of Premium (ROP) plan, all your paid premiums (minus taxes and charges) are refunded when the policy matures, provided no claim has been made.
| Ditto’s Take: It’s generally not recommended to extend a term life insurance policy beyond the age of 65–70. By that age, most people have already cleared significant financial obligations, like paying off loans or supporting children, who are usually independent by then. Extending coverage comes with significantly higher premiums, which often outweigh the benefits. |
Now that you know what happens at the end of a policy term, let’s compare term life insurance with whole life insurance to understand which might be better for your needs.
Term Life vs. Whole Life Insurance
| Feature | Term Insurance | Whole Life Insurance |
|---|---|---|
| Duration | Fixed Term (10-40 years) | Lifetime coverage (up to 99+ years) |
| Premiums | Substantially Lower | Higher |
| Cash Value | No | Yes (savings/investment component) |
| Payout | Only if death occurs during the term | Guaranteed |
| Purpose | Protection | Protection + Savings |
While both term and whole life insurance fall under the broader category of life insurance, they serve very different financial purposes. The distinction lies in their duration, structure, and the presence (or absence) of a savings component.
Whole life insurance is a long-term product, typically offering coverage until age 99 or beyond. It includes a cash value component that accumulates over time, allowing policyholders to access funds during their lifetime. Because the insurer is guaranteed to pay the death benefit eventually, the premiums are significantly higher. Essentially, you're combining insurance with forced savings.
Term life insurance, on the other hand, offers pure protection for a fixed term, like 20, 30, or 40 years. If the policyholder passes away within this term, the nominee receives the death benefit. There is no cash value or maturity benefit, which is what keeps premiums low and coverage high. For the same premium, a term plan can offer up to twice the coverage of a whole life policy.
Lifetime Term Plans: A Hybrid Offering
Some insurers now offer term plans with coverage until age 99 or 100, commonly referred to as “Whole Life Term Plans”. These don’t have a savings element but do provide a guaranteed death benefit for life. Premiums are higher than those of regular term plans but still lower than those of traditional whole life insurance.
These plans can be helpful for:
- Legacy planning, such as leaving money for heirs or charitable causes
- Individuals with lifelong dependents, like parents of specially-abled children
| Ditto’s Take: At Ditto, we believe term life insurance should first and foremost cover essential financial obligations, like your family’s living expenses, outstanding debts, and your children’s education. Once those needs are secured, you can consider extended coverage or plans with savings elements if they genuinely fit into your broader financial strategy, not just because they sound more “comprehensive.” |
Conclusion: What is the purpose of term life insurance?
So, what is the purpose of term life insurance? At its core, term life insurance is about financial protection, not profit. Its purpose is simple yet powerful: to ensure that your loved ones can continue living with dignity and stability, even if you’re no longer around to support them. Whether it’s repaying debts, funding your child’s education, or simply covering daily expenses, term insurance fills the financial gap your absence could create.
Think of it not as a financial investment, but as an emotional one—an affordable monthly or annual cost you incur for peace of mind. For just a fraction of your income, you’re securing crores in coverage, effectively leveraging your premium to create a robust financial safety net. In a world where uncertainty is the only certainty, a term plan assures you that your family’s future is protected, no matter what. And that’s a priceless return.
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FAQs
What’s the right age to buy term life insurance?
The earlier, the better, as young buyers get lower premiums for higher coverage.
Can I increase my coverage later?
Yes, many plans offer a life stage benefit that allows you to increase your coverage later. You can also purchase additional term plans in the future based on your requirements but ensure that you declare the existing plans while applying for new ones.
Is a medical test mandatory?
Often yes, depending on age and sum assured—but it ensures accurate pricing and smooth claim processing.
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