Term insurance vs Life Insurance- Difference you should know!
Life insurance has evolved into an essential instrument for protecting family members who are financially dependent on us. In recent years, there has been a significant increase in the number of people acquiring life cover to provide a financial safety net for their families.
However, there are various types of insurance plans available, which can be confusing for many people. Term insurance is one example of such coverage. This article is especially suitable for those who think of term life insurance and life insurance as it will provide you with the distinction between the two.
What is term insurance?
Term insurance is one type of life insurance policy that provides coverage for a set period of time and pays out the death benefit if the policyholder dies unexpectedly. However, policyholders must make frequent premium payments to keep their coverage active.
Types of Term Insurance Plans
Increasing Term Insurance Plan: You pay the same premium throughout the tenure of your policy.
Increasing Term Insurance Plan: This is where the coverage increases as you age.
Decreasing Term Insurance Plan: the coverage lowers as you age.
Convertible Term Insurance Plan: You can alter the insurance plan whenever you wish.
Term Insurance Plans With Riders# – where the insurer offers add-on covers to the term insurance plan.
What is life insurance?
Typically, when purchasing life cover, one portion of the premium is utilized to provide death benefits, while the other portion is retained to produce profits. The coverage provided is more extensive than a term plan.
Types of life insurance plans:
Whole life insurance plans: As the name suggests, the insurance company provides life cover throughout the policyholder’s tenure.
Endowment Assurance Plan: where the policyholder receives maturity benefits after surviving the duration of the insurance.
Money-Back Plan: the policyholder receives maturity benefits in installments after the conclusion of the policy term.
Child Plan – meant to help you guarantee the financial future of the insured’s child.
Unit-Linked Insurance Plan (ULIP): It combines life insurance and market-linked investments.
Pension Plan: the policyholder receives a fixed sum every month after retirement.
Differentiating Features
1. Purpose: Term insurance is primarily intended to provide financial protection to dependents in the case of the policyholder’s death. Life insurance, in addition to providing protection, includes an investing component for wealth accumulation and other financial objectives.
2. Premium: Because term insurance policies provide pure protection, their premium rates are typically lower than others. Life insurance premiums are often higher due to the combination of protection and investing aspects. For example, a 30-year-old individual will pay approximately Rs 7,000 per year for a term insurance policy with a cover of Rs 50 lakhs. A life insurance policy with a similar death benefit would cost between Rs 1 lakh and Rs 5 lakhs per year, depending on the benefits offered.
Thus, if you want to provide appropriate financial protection for your family, term insurance is the best option. However, life insurance programmes can protect your family’s particular financial goals.
3. Policy duration: Term insurance policies have a set duration, and coverage ends at the end of that period unless renewed. Life insurance coverage can last a long time, up to the policyholder’s entire life.
4. Cash Value: Term insurance does not accumulate cash value. In contrast, life insurance policies may have a surrender value or provide loans against the cumulative cash value.
5. Maturity Benefit: Because term insurance policies are primarily designed to give a death benefit, they do not include any maturity benefits. Life insurance policies, depending on the type, provide maturity proceeds if the insured survives the policy’s term.
6. Death Benefit: A term insurance policy’s primary benefit is the death benefit amount (sum assured). In the event that the policyholder dies during the policy term, the nominee receives the death benefit. However, term insurance plans have no maturity value. Thus, if the policyholder survives the policy term, the plan simply terminates with no payout.
A life insurance plan, on the other hand, provides both a death benefit and a maturity benefit. It depends on the sort of life cover you select. Some plans offer guaranteed benefits, while others provide assured benefits.
7. Tax benefits: Sections 80C and 10(10D) provide tax benefits for both life and term insurance products. Investments of up to Rs 1.5 lakhs in life or term insurance are tax deductible. Life insurance plans provide both maturity benefits and cash flow possibilities. Under section 10(10D), the payments you receive from life insurance plans are tax-free.
Choosing the Right Insurance.
Term insurance and life insurance plans provide death benefits in the event that the insured dies. When picking between term and life insurance, you must evaluate your individual financial goals and needs. Term insurance is appropriate for individuals looking for pure protection at a low cost, particularly if they have financial dependents. If you are searching for a pure life insurance plan, a basic term insurance plan is a smart alternative because it provides a sum assured for a low premium. Life insurance is appropriate for those who want to protect themselves while also saving or investing for the future. In other words, if you want more comprehensive coverage and/or wealth generation in addition to protection, you can look into a variety of life insurance options. To make an informed decision, consider premium affordability, duration of coverage, financial goals, and risk appetite.
