Term Insurance Deep Dive

Sizing a term plan is the single most important decision in the protection plan. The four broad methodologies an advisor evaluates are (a) the income-replacement multiple — typically 15-20x annual gross income for a primary breadwinner in their 30s, scaling down with age as the residual earning years reduce; (b) the Human Life Value (HLV) approach mandated under IRDAI guidance, which discounts the future net contribution of the life insured to the family at an assumed real rate (typically 4-6%) over the residual working years; (c) the expense-replacement approach, which sizes a corpus that, deployed at a sustainable withdrawal rate, generates the family's ongoing expense obligation; and (d) the goal-and-debt approach, summing outstanding debt (home loan, education loan), specific future goals (children's higher education, marriage), and a residual income-replacement corpus. A defensible recommendation usually triangulates two or three of these. Riders modify the base contract: the Accidental Death Benefit rider doubles or triples the payout if death is by accident; the Permanent Disability rider waives future premiums and may pay an additional sum on total permanent disability; the Waiver of Premium rider waives future premiums on diagnosis of a critical illness or disability while keeping the cover in force; and the Critical Illness rider attaches a CI lump-sum to the term policy. Premium structures vary: level term keeps the sum assured constant; increasing term steps the cover up annually (typically 5-10%) to counter inflation; and return-of-premium term refunds premiums on survival but is usually 2-3x more expensive and rarely advisable. Premium payment terms include regular pay (premium payable across the full term), limited pay (premiums concentrated in the first 5-15 years), and single pay. Claim settlement ratio (CSR) — the proportion of claims paid by an insurer in a financial year as reported in the IRDAI Annual Report — is widely cited but should not be read in isolation; advisors look at three-year averages, claim repudiation reasons, average claim-processing time, and the insurer's solvency margin (regulatory minimum 1.5x). Tax treatment: premiums qualify for deduction under Section 80C up to ₹1.5 lakh aggregate, the death benefit is fully tax-free for the nominee under Section 10(10D), and GST is levied at 18% on the premium.