Term Life Insurance : How It Works And What You Need To Know

Term life insurance is a life insurance product where the policyholder pays regular premiums to the insurance company for a set number of years. In return, the insurance company will assure your family/loved ones with financial compensation worth the cover amount, in the event of your unfortunate and untimely demise during the insured period. 

Quite helpful, right? But what if we tell you that the Indian masses barely use a product as beneficial as a term plan? According to the reports, life insurance penetration in India is a mere 2.74%. To put it into perspective, only 3 out of 100 people have life insurance.

What is the reason behind such low numbers ? Research suggests that a lack of awareness about insurance products and their buying process has contributed to the low life insurance penetration we see today. So, we decided to make a difference. In this article, we deeply dive into term life insurance products and the process behind purchasing them.      

How Does It Work – Application Process

The very first thing that you should know about is the application process. For this, you need to go through these 7 steps :

1. Evaluate your requirements

You must evaluate your requirements before proceeding with the application ; this includes insurance cover amount, cost of premium, and additional coverage. 

To determine how much money your family would require to be financially secure, you can opt for the Human Life Value (HLV) method. Here, your current and future potential income, along with liabilities like debt and loans, are considered to form a base requirement. 

Human Life Value (HLV) = [Current annual income – Yearly expenses/premiums/tax payments] x (No. of years left till coverage period) – (Expected debt/expenses in the same duration)

Otherwise, you can follow the thumb rule to cover your life with an insurance plan offering coverage equal to at least 10 times your current annual income.

For example : If you have an annual income of ₹5 lakhs, you should get a term plan of at least 

₹5 lakhs x 10 = ₹50 lakhs cover.    

2. Compare policies

As an informed customer, you should not be hasty in your decision. Proper comparison of price vs cover amount from the insurers is critical. Please understand that prices for the same cover amount may vary depending on the benefits included, riders and your profile.
Generally, the following parameters can influence your term plan quotations:

• Your current age
• Policy term
• Coverage amount
• Health condition
• Type of insurance plan
• Riders
• Additional inclusions and exclusions of the plan

3. Submit proposal form

You are asked to complete a proposal form once you decide to proceed with a particular insurance policy. This can be a digital or physical form, depending on where you are buying the policy from. Needless to say, filling out forms online is easier, though. Based on the details provided, the insurance provider assesses your risk profile and creates the terms and conditions of the plan accordingly.
The following details will be asked from you in the proposal form:  

• Personal details
• Health and lifestyle details
• Income details
• Other details

Do note that you must input the correct details in this form. Any inaccuracies, if found later, can lead to the rejection of your policy and death claims.

4. Nominee assignment

In this step, you need to add beneficiaries to your policy. This entails the individuals who can claim a cover amount if you die.  Your spouse, children, relatives, or friends can be nominated. However, in some cases, you can even opt for an external party or charity to receive the proceeds of your insurance. 

5. Income and Medical verification

Once your insurance application is submitted, the insurer verifies your income documents and medical information shared. In a few cases the results of the test will be the prime determinant of the policy issuance, premium changes and coverage period of the policy (in some cases). It is best recommended to provide right information during the application process to get any surprising changes in premium or policy coverage terms later. 

6. Final contract sign

Once you convey all the necessary information to the insurance entity, you will receive the final insurance contract. This agreement will entail all the policy details, like the cover amount, insurance term, policy inclusions and exclusions, and premium amount. 

After verifying all the details and the terms and conditions, you will be asked to submit the required documents and sign the contract. 

7. Medical tests 

The insurer may ask you to undergo specific medical tests to cross-check the medical information you shared. This may include medical examinations like:

• Treadmill test
• Blood tests (To check for diabetes, heart conditions, haemoglobin levels, etc.)
• Drug tests 
• Other tests (HIV, liver function, ECG, etc.)

Do note that if you have lied about your health conditions and the medical report exposes it, the insurer can decline the proposal request and not issue the plan.

8. Issuance

After all the process is done, a team of underwriters will verify your insurance application form. They will evaluate and check all the documents for its authenticity. After a successful verification, they will issue the policy in your name. 

How do Death Benefits Work?

Next up, you must also be aware of how your family can avail of the insurance death benefits:

• Informing the insurance company: The nominee or related well-wishers of the insurer member can initiate the claim process by informing the insurance provider in case of insured member’s demise. 
• Death claim form: Your nominee will be asked to complete a death claim form. This form will collect the details of the deceased, the claimant, the term insurance plan, and the cause of death. 
• Documents for insurance claim: The insurance company will ask for specific documents before starting the claim process. The documents required for the claim are:
  • Signed claimant statement form
  • Cause of death
  • Death certificate
  • ID and address proof of the claimant
  • Photographs of the claimant
  • Self-attested PAN card copy
  • Cancelled cheque/bank statement/passbook
  • FIR (Only for unnatural deaths)
  • PMR (Only for unnatural deaths)
  • Police investigation reports (Only for unnatural deaths)
  • Hospitalisation records
     
• Evaluation: The submitted documents will be sent for evaluation. The insurance company will cross-check for any discrepancies and decide whether or not to settle the claim.
• Payment: If everything checks out, the proceeds of the term plan will be deposited to the claimant’s bank account. 

Key Takeaways

Term life insurance is an effective way to secure your family’s financial future at an affordable cost. However, choosing the right plan requires careful comparison and consideration. So, ensure you understand the policy’s terms and conditions, benefits, and claim process before purchasing it. Additionally, platforms like PhonePe offer unlimited convenience and a seamless insurance purchase experience.