Term insurance
Also written Term plan · Term life insurance · Pure protection plan
Life cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
In plain language
Term insurance does one job and refuses to do any other.
You choose a sum assured and a term. You pay a premium. If you die during that term, your nominee receives the sum assured. If you are still alive when the term ends, the policy simply stops and you get nothing back.
People hear "nothing back" and call it a waste. It is the opposite. Because the insurer is paying out only on death, and most policyholders survive the term, the premium buys an enormous amount of cover for very little money. Every rupee you pay is buying protection, and none of it is being diverted into an investment you did not ask for.
The workbook's framing of insurance generally applies here: it lets individuals protect themselves against significant potential losses and financial hardship at a reasonably affordable cost, in exchange for a periodic payment called the premium.
How it works
The vocabulary the exam uses: the insurer provides the insurance, the insured or policy holder buys it, the premium is the periodic payment, and the insurance policy is the contract setting out the conditions and circumstances in which the insured will be compensated.
Term insurance sits inside a family of life products, and the whole examinable point is the contrast:
| Product | Pays on death | Pays on survival |
|---|---|---|
| Term insurance | Sum assured to the nominee | Nothing |
| Endowment insurance | Sum assured | Lump sum on maturity |
| Whole life | Yes — stays active as long as premiums are paid | No fixed term |
| ULIP | Yes | Part of each premium goes to insurance, the rest is invested in equity and debt |
Only term insurance is pure risk cover. The other three mix protection with saving, and the mixing is what makes their cover per rupee of premium so much smaller.
A worked example
Sandeep is 32, earns Rs 9,00,000 a year, has a home loan of Rs 35,00,000 outstanding and a three-year-old daughter.
He buys a term plan of Rs 1,00,00,000 for 30 years. Assume, for illustration, an annual premium of about Rs 12,000 — roughly Rs 1,000 a month, or 1.3% of his income.
If he dies in year seven, his family receives Rs 1 crore. They clear the home loan and still hold roughly Rs 65 lakh, which at a conservative 7% produces about Rs 4,55,000 a year without touching the capital.
Now price the alternative. An endowment policy at the same Rs 12,000 a year would typically buy a sum assured nearer Rs 3,00,000 to Rs 4,00,000, because most of the premium is being saved rather than spent on cover. On the same death in year seven, the family receives that — and still owes Rs 35 lakh on the house.
Same outgo, same household. One outcome is a paid-off home; the other is a forced sale.
Why NISM asks about it
Chapter 6 (Insurance Related Products) sets out term, endowment, whole life and unit-linked insurance in a single comparison table, and that table is what the questions come from. Expect to be asked which policy pays nothing on survival (term), which pays a lump sum on maturity or on death (endowment), and which splits the premium between cover and investment (ULIP). The nominee's role — receiving the sum assured — is asked alongside.
Common exam traps
- No maturity value, by design. Survive the term and nothing is returned. An option offering "term insurance pays a lump sum on maturity" is describing endowment.
- Term is not whole life. Term runs for a stated period; whole life stays active as long as premiums are paid.
- A ULIP is not term insurance. Part of a ULIP premium buys cover and the rest is invested in equity and debt — it is an insurance-plus-investment product.
- The nominee receives the sum assured, but is a custodian, not necessarily the owner. Where the two differ, the legal heirs' claim governs.
- Insurance is risk management, not investment. The workbook classes it under managing the risk of an uncertain future loss.
- Life insurance premium is among the items eligible for deduction under Section 80C — which is a tax consequence of buying cover, not a reason to buy the wrong cover.
Where this is taught
- Series X-B · Chapter 2: Features of Life Insurance Productsintroduced here
- Series SEBI-ICE · Chapter 6: Insurance Related Productsintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
Related terms
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- NomineeThe person you name to receive custody of your money or securities when you die — a custodian who must pass the asset to the legal heirs, not the owner of it.
- Section 80CThe income-tax deduction for money put into life insurance, provident fund, ELSS, five-year bank deposits, NPS Tier 1, NSC and home-loan principal, capped in aggregate at Rs 1,50,000 a year.
- Sum assuredThe amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
- Unit Linked Insurance PlanA life insurance policy in which the premium, after the cost of risk cover and expenses, is invested in equity or debt funds chosen by the policyholder, so the maturity value is the fund value.
- Life insuranceThe product family that covers loss of income: temporary loss from disability and permanent loss from death — the first of the three covers in a household insurance plan.
- InsuranceThe risk-management approach that pays an explicit upfront premium to remove the downside while keeping the upside — which in derivatives means buying an option rather than selling a future.
- Human Life ValueThe present value of the income a person is expected to earn over their remaining working life that is available for dependents — the upper bound on how much life cover is justified.
- Personal accident insuranceA policy paying a defined sum where the insured sustains bodily injury solely and directly from an accident caused by external, violent and visible means — covering three grades of disablement.
- Critical illness insuranceA defined benefit policy that pays a lump sum when the insured is diagnosed with a specified disease such as cancer, heart attack or stroke and survives a minimum period — no payment on death.
- Surrender valueThe amount an insurer returns when a policyholder discontinues an investment-cum-insurance policy early — at least 30% of premiums paid under the workbook's rules, rising to 90% near maturity.
- Paid-up policyAn investment-cum-insurance policy that continues without further premiums after the policyholder stops paying, with the sum assured cut in proportion to premiums paid versus premiums due.
- IRDAIThe Insurance Regulatory and Development Authority of India, the regulator of India's insurance sector. It protects policyholders' interests and handles grievances on insurance contracts and ULIPs.
- Property insuranceInsurance that pays the owner or renter of a building back for damage to, or theft of, the building and its contents. Includes homeowner's, renters, flood and earthquake insurance.
- Group insuranceOne insurance policy that covers a defined group of people together, such as the members of a society or professional association, or the employees of a particular employer.
- Whole life insuranceA type of life insurance policy that stays active for as long as you keep paying the premiums, rather than for a fixed term like term insurance.
- Keyman insuranceA life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
- Insurance policyThe written contract an insurer gives a policy holder. It states the premium, the sum assured, and the conditions under which the insurer will pay a claim.
- Section 80DThe income-tax deduction for medical insurance premiums paid for yourself, your spouse, your dependent children and your dependent parents — the workbook does not state a rupee ceiling.
- Variable Insurance ProductA life insurance policy that credits the investment part of the premium to a policy account earning a defined minimum floor rate plus any index-linked or bonus additions; minimum term 5 years, lock-in 3.
- Income replacement needThe insurance need that arises from a risk to the earning ability of an asset, including a person and their life, met by life, critical illness, accidental disability and annuity products.
- Level premiumA term insurance premium that stays the same every year for the whole of the policy term, as distinct from one that increases as the insured gets older.
- Maintaining a foreign life policyA person who becomes resident in India need not buy fresh life cover here and may keep an existing overseas policy alive, paying the premiums from foreign income or remitting them from India.
- Minimum sum assured ruleThe IRDAI requirement that a life policy provide a minimum sum assured of 10 times the annual premium below age 45, 7 times above 45, and 5 times where the term is under 10 years.
- Survival benefitThe life insurance benefit paid when the insured survives a specified period - the half of a policy that a pure term plan does not have, and the reason an investment cum insurance policy costs more.
- Telescopic premiumsLife insurance premiums that do not rise in the same proportion as the sum assured - a larger cover costs a lower rate of premium per thousand of sum assured, up to a limit set by each insurer.
- Term insurance with return of premiumA term insurance variant that pays back the premiums at the end of the term if the insured survives - the workbook computes the implied return on the extra premium at 4.61%.
- ULIP Type IIThe ULIP structure in which death before maturity pays the sum assured plus the fund value, while maturity pays the fund value alone — the most generous of the death-benefit wordings the workbook lists.