Term Insurance: The Most Important Policy Nobody Wants to Buy
Vikram is 32, married, with a one-year-old daughter. He earns ₹18 lakh a year. His wife left her job to take care of the baby. They recently bought a flat with a ₹45 lakh home loan. EMI: ₹38,000 a month.
Vikram has three LIC policies (also called LIC endowment policies) his father helped him buy when he started working. Total premium: about ₹35,000 a year. He thinks he’s covered.
Then a colleague at work dies in a road accident. 34 years old. Leaves behind a wife and two kids. The office does a collection. Someone mentions that he didn’t have term insurance. His family gets the LIC maturity value of ₹12 lakh, eventually. That’s it.
Vikram goes home that night and does the math. If something happens to him, his wife has a ₹45 lakh home loan, a baby, no job, and three LIC policies that might give her ₹15-20 lakh after years of waiting. That’s not protection. That’s a disaster waiting to happen.
What is term insurance?
Term insurance is simple. You pay a small premium every year. If you die during the policy term, your family gets a large lump sum (the sum assured). If you survive the term, you get nothing back. In short, term insurance replaces your income if you’re not around.
That “nothing back” part is why most Indians avoid it. It feels like a waste. “Why pay for something I won’t get back?”
But that’s exactly what makes it powerful. Because there’s no savings or investment component, the premium is extremely low for a very high cover.
A quick comparison:
| LIC Endowment | Term Insurance | |
|---|---|---|
| Annual premium | ₹30,000-40,000 | ₹8,000-12,000 |
| Cover (sum assured) | ₹10-15 lakh | ₹1 crore |
| What you get if you survive | Maturity amount (~₹15-20 lakh after 20 years) | Nothing |
| What your family gets if you die | ₹10-15 lakh | ₹1 crore |
| Effective return | ~4-5% (often less than a bank FD) | Pure protection, no return |
The difference is stark. For less than one-third the premium, you get 7-10x the cover.
Who needs term insurance?
Anyone whose family depends on their income. If you die tomorrow, ask yourself:
- Can your spouse maintain the same lifestyle?
- Can your children’s education be funded?
- Can the home loan EMI be paid?
- Can your parents be supported?
If the answer to any of these is no, you need term insurance.
If you’re single with no dependents, no loans, and your parents are financially independent, you can wait. But premiums go up with age, so buying early locks in a lower rate.
How much cover do you need?
A common rule: 10-15 times your annual income. But it’s better to calculate based on what your family actually needs:
- Outstanding loans: Home loan, car loan, education loan
- Living expenses: Monthly expenses × number of years your family needs support
- Children’s education: Estimated cost of school and college
- Parents’ support: If they depend on you financially
Example: Vikram earns ₹18 lakh/year. Home loan: ₹45 lakh. Daughter’s education (estimated): ₹30 lakh. Family expenses for 15-20 years: ₹1-1.5 crore. He needs at least ₹1.5-2 crore cover.
A ₹1 crore term policy for a 30-year-old non-smoker costs roughly ₹8,000-12,000 per year. A ₹2 crore policy costs ₹14,000-20,000. That’s ₹1,000-1,700 per month.
Pro tip: If you’re married, buy your term policy under the Married Women’s Property (MWP) Act. It’s a simple checkbox during the online application. It creates a trust so the payout goes directly to your wife and children. Without it, creditors (including your home loan bank) can claim the insurance money before your family sees a rupee.
When to buy
Now. Two reasons:
- Premiums increase with age. A policy bought at 25 is significantly cheaper than the same policy bought at 35. The rate you lock in stays for the entire term.
- Health problems can disqualify you. If you develop diabetes, heart issues, or any major condition, insurers will either charge a much higher premium or reject you outright. Buy when you’re healthy.
What to look for
- Claim settlement ratio. Out of 100 death claims filed, how many did the insurer actually pay? That’s the claim settlement ratio. Look for above 95%. LIC is around 98%. HDFC Life, ICICI Prudential, and Max Life are consistently above 97%. Also check the amount settlement ratio: what percentage of the total claimed amount was paid out. An insurer might settle 99% of small claims but reject the large ones.
- Policy term. Cover yourself until at least 60. If you buy at 30, get a 30-year term.
- Online policies are cheaper. No agent commission means the premium is 30-40% lower. Same policy, same insurer, just bought online.
- Riders (optional add-ons). Riders are extra features you can attach to your base policy for a small additional premium. Think of them as upgrades:
- Critical illness rider: Pays a lump sum if you’re diagnosed with cancer, heart attack, etc. Useful, but compare the cost with a standalone critical illness policy.
- Accidental death rider: Pays extra if death is due to an accident. Usually cheap.
- Waiver of premium: If you become permanently disabled, future premiums are waived. Worth considering.
The LIC trap
This needs to be said plainly. LIC endowment plans, money-back plans, and Jeevan-something policies are not insurance. They’re bad savings products disguised as insurance.
They give you ₹10-15 lakh cover for ₹30,000-40,000 annual premium. A term plan gives you ₹1 crore cover for ₹10,000.
The “maturity amount” LIC promises sounds nice, but the effective return is 4-5% after 20-25 years. A simple bank FD does better. An index fund would turn that same premium into several times more.
I had three LIC policies. Paid about ₹35,000-40,000 a year across all three. I bought them because that’s what everyone around me did. Your parents buy LIC, their parents bought LIC, the LIC agent is a family friend. Nobody questions it.
It wasn’t until I bought my first home that I started seriously learning about personal finance. The home loan EMI forced me to look at where my money was going. I always had an interest in finance. I even moved to the banking and finance domain at work thinking it would help. But personal finance is different from corporate finance. When I finally understood the math, I surrendered all three LIC policies the same year and bought a ₹1 crore term plan. The term plan premium was a fraction of what I was paying for those three policies combined, and the cover was many times higher. That was 2012. I wish I had done it sooner.
Common mistakes
- Buying LIC plans instead of term insurance. The most expensive mistake. You pay more for less cover, and the returns barely beat inflation.
- Delaying the purchase. Every year you wait, the premium goes up. And if your health changes, you may not get a policy at all.
- Underinsuring. A ₹25-50 lakh policy is not enough if you have a home loan and a family. Calculate your actual need.
- Not disclosing medical history. If you hide a pre-existing condition and your family files a claim, the insurer can reject it. Be honest in the application. It’s not worth the risk.
- Buying through an agent when you can buy online. Same company, same policy, 30-40% cheaper online. The agent adds no value for term insurance.
The bottom line
LIC endowment policies don’t protect your family if you die (₹10-15 lakh won’t cover a home loan), and they don’t grow your money if you survive (4-5% returns don’t even beat a bank FD). They fail at both jobs.
Your emergency fund covers a lost job. Your health insurance protects your current wealth. Term insurance protects your family’s future.
It’s the cheapest, most important financial product you’ll ever buy. And the only one where you hope you never need to use it.
Now that you’re protected, there’s one thing left before you start investing: knowing where your money actually goes. Next up: where does your money go every month?