The need for insurance is quite profound and every individual needs to have one to secure their future and that of their family. The recent pandemic has asserted this fact quite strongly. However, most individuals purchase insurance only for the tax benefits that they provide under section 80C. One of the many questions that people often face while buying insurance is whether to buy term insurance or life insurance. Many use the two words synonymously and do not even know that they are actually different products serving two different purposes. Given below is the meaning of the two and the key differences between them to help make sound insurance decisions.
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What is term insurance?
Term insurance is a type of life insurance in its purest form. It provides coverage for a fixed period or for life as the case may be. Such a person is insured for the contracted time period. In case of their demise during the contracted period, their family (nominee or the legal heir) is compensated as per the coverage secured under the term plan.
On the other hand, if the insured person survives the contracted period, there are no maturity benefits (other than under the Return of Premium plan) under the term plan that are provided to the insured person. The insured person has to pay the premium regularly as per the agreed terms of the insurance contract to keep the coverage active.
The insured person can opt for multiple variants of premium payments offered by the insurer which can be a one-time premium payment plan, a partial premium payment plan, or a regular premium payment plan. A few types of term insurance plans are Level term Insurance Plans, Increasing or Decreasing Term Insurance Plans, Return of Premium Term Plans, Convertible Term Insurance Plans, and Term Insurance Plans with Riders.
What is life insurance?
Life insurance plans are also used to provide financial security to one’s family. However, they are an extended version of term plans where they not only provide death benefits but also act as a good savings instrument proving tax benefits along the way. A portion of the life insurance premium is used to steadily build a corpus.
One of the key differences between life insurance and term insurance is the former also provides survival benefits along with death benefits which is not the case with the latter. The most common type of life insurance is in the form of whole life insurance which provides coverage for 99 years or 100 years. The other types of life insurance include ULIPs (Unit Linked Insurance Plans), Endowment Plans, Pension Plans, and Money Back Plans.
What are the key differences between term insurance and life insurance?
Term insurance and life insurance instruments are both used as safety net to protect the family’s future in the unfortunate event of death in the family. However, there are a few basic differences between these products. These differences are highlighted hereunder.
|Term insurance provides basic insurance coverage to the insured person and the nominees or the legal heir receives death benefits if the insured person does not survive during the coverage period. However, there are no maturity benefits if the policyholder services the policy tenure.
|Life insurance also provides death benefits as well as maturity benefits to the nominees or the insured person as the case may be.
|Cost of insurance (Premium Cost)
|The premium cost of term insurance is quite low compared to life insurance. This makes it more affordable for every individual.
|Life insurance premiums are quite costlier compared to a basic term insurance plan as they provide maturity benefits as well as death benefits to the insured person.
|The average tenure for a term insurance plan is usually up to 35 years. This tenure can be higher too depending on the policies of the individual insurers.
|The average tenure for life insurance is usually between 5 years to 30 years. Whole life insurance plans provide coverage for the full life of the insured person or till 100 years.
|Bonuses and Add-ons
|Term plans are plain vanilla insurance plans that have the sole purpose of providing death benefits. There is no option of getting any bonuses or add-ons on these plans
|Life insurance plans on the other hand have the benefit of getting add-ons or bonuses like guaranteed additions or loyalty additions on their primary insurance plans. These additions ensure that the policyholder gets a higher value from their insurance plan.
|There is a limited scope of flexibility in term plans. Policyholders can only upgrade or alter their plans from basic plans to Return of Premium Plan, adding accidental benefits, critical illness cover, etc.
|Life insurance plans have the benefits of being quite flexible and allow partial withdrawals against the plan, access to loans, pay additional premiums, etc.
|Paid-Up Value and Surrender value
|There is no concept of paid-up value or surrender value in term plans. If the policyholder does not meet the premium payments, the policy will lapse and nominees will not get any death benefits under the plan.
|The coverage in life insurance plans does not lapse if the policyholders can no longer continue meeting premium obligations. The minimum number of premiums on the policy have to be paid after which if they are discontinued, the policy will become a paid-up one. The coverage on the policy will be reduced but will stay active.
Policyholders have the option to surrender the policy and get the surrender value on the original policy at such time.
To compare term insurance and life insurance and choose a better plan between the two is like choosing between apples and oranges. These are fundamentally different products that have different features and offer different benefits. Death benefits under term insurance are quite higher than the maturity benefits under life insurance. Term insurance is a must for every person to secure their family’s future while life insurance can also be used as a savings tool along with providing insurance coverage. Therefore, a combination of the two or a plan that meets all the needs of a person can be the right answer to choosing between the two options.
Most term plans do not provide coverage to persons more than 65 years of age. However, there are a few insurers that provide coverage under term plans for persons of 75 to 80 years of age.
A term plan provides maximum coverage at lower premiums compared to life insurance plans. Hence, it is important to have a term plan.
The best age to buy insurance coverage is at the start of one’s career as one usually has lower responsibilities at such time. Also, they are at the prime of health which can help them get higher coverage as well as afford the premium for the same.
The premium paid for term insurance and life insurance is deductible under section 80C up to Rs. 1,50,000. Furthermore, death benefits or maturity benefits received from term insurance or life insurance are exempt under section 10(10D) of the Income Tax Act.