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.
Check yourself
1.Which statement describes term insurance?
- a)It pays a lump sum on maturity as well as on death
- b)Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
- c)It stays active as long as premiums are paid, with no fixed term
- d)A portion of the premium is invested in equity and debt
Show the answer
Answer: (b) Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
"In event of your unfortunate demise DURING THE POLICY TERM, your nominees will receive the 'SUM ASSURED' which you had selected while purchasing the plan. Active for a FIXED PERIOD OF TIME (popularly referred to as the 'term of the policy')." Nothing about maturity, nothing returned on survival — and that bareness is exactly what makes the cover so large for so small a premium, since almost the whole premium buys protection rather than being saved for you. The wrong options each describe a different product: (a) is endowment, which pays "a lump sum amount after a specific term (on the maturity of the policy) OR on death"; (c) is whole life, which "stays active as long as you pay the premiums"; and (d) is unit linked insurance, where "a portion of the premium... is utilized to provide insurance coverage... and the remaining portion invested in equity and debt instruments."
2.What is a unit linked insurance plan?
- a)A policy that invests the entire premium in equity and debt with no insurance element
- b)A combination of insurance and an investment vehicle, in which a portion of the premium provides insurance coverage and the remaining portion is invested in equity and debt instruments
- c)A pure protection policy with the largest sum assured per rupee of premium
- d)A policy issued only to groups of employees
Show the answer
Answer: (b) A combination of insurance and an investment vehicle, in which a portion of the premium provides insurance coverage and the remaining portion is invested in equity and debt instruments
"Combination of insurance and an investment vehicle. A PORTION of the premium paid by the policyholder is utilized to PROVIDE INSURANCE COVERAGE to the policyholder and the REMAINING PORTION INVESTED IN EQUITY AND DEBT INSTRUMENTS." That structure has a direct consequence worth carrying: if only a portion buys cover, then for a given premium the cover must be smaller than a pure term policy would provide — option (c) describes term insurance, not a ULIP. This is not a criticism of the product; it is arithmetic, and it is the reason Chapter 1 set out five questions to ask before signing a bundled "insurance plus investment plus tax saving" contract: what portion is cover, what are the charges, what happens on stopping, what is paid and when, and what is the free-look period.
3.A household spends ₹30,000 a month. The sole earner holds one endowment policy with a sum assured of ₹3,00,000. How should the adequacy of this cover be assessed?
- a)It is adequate, since some cover exists
- b)It covers under one year of household expenditure — the test is how long the family could live on it, plus outstanding liabilities and dated goals at future value
- c)It is adequate because the premium is affordable
- d)Adequacy cannot be assessed without knowing the maturity value
Show the answer
Answer: (b) It covers under one year of household expenditure — the test is how long the family could live on it, plus outstanding liabilities and dated goals at future value
Annual expenditure is ₹3,60,000, so a sum assured of ₹3,00,000 buys the family about ten months. That is not protection; it is a delay — the household arrives where it would have been anyway, a year later. The booklet gives no formula, and none is examinable, but the reasoning comes straight from Chapter 3: a plan must estimate financial needs "during his or her lifetime", and goal-based investing works from future value. Three things therefore belong in the calculation — ongoing household expenditure until the children earn, outstanding liabilities, and dated goals such as education and marriage at their future cost, since inflation does not pause for a death. Option (c) reverses the logic: affordability is a constraint on the premium, not a measure of the cover. Option (d) confuses two products — under term insurance there is no maturity value at all, and the family's need is unaffected by whether any exists.
Where this is taught
- Series X-B · Chapter 2: Features of Life Insurance Productsintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series SEBI-ICE · Chapter 6: Insurance Related Productsintroduced 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 selected when buying a life policy, which the nominees receive on the death of the insured during the policy term.
- 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.
- 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.