Life insurance is synonymous with financial protection, since these compensate against any financial loss incurred in case of premature death. These plans are designed to help an individual fulfil life goals effectively. For instance, a child insurance plan helps in creating a secured financial corpus for one’s child. Similarly, pension plans help in creating a retirement fund and lifelong income. Life insurance plans can be used in every aspect of one’s life to gain financial security.
Life insurance comes in many forms, one of the variants being term insurance. This form is often compared with other types of life insurance plans. Term plans differ from other types of life insurance plans in many aspects. Here, we will try to understand these differences while exploring the concept of term insurance.
Introduction to three main insurance policies:
Insurance is financial aid for an unpredictable circumstances of life. An unforeseen situation can occur at any place to anyone at any point in time. To plan for such situations, there are various types of insurance like health, term, life insurance, etc. These three–term insurance, life insurance and health insurance are the ones that provide assistance for human health or life loss. Let us explore these three in detail:
1. Term insurance policy:
Term insurance is for a fixed term such as 20/40 years. Through this insurance format, insurance companies provide financial support to the nominee of the policyholders in the event of the policyholder’s death within the policy term. Term insurance is also known as a pure protection plan since it provides protection to the life insured’s family in case of his/her death. It allows no claim to the money in case the person survives the policy tenure.
2. Life insurance policy:
Under this, policyholders receive benefits at the time of policy maturity. Irrespective of whether the person is alive or attains death, the payment is guaranteed under this policy format. The policy holder can decide on the policy term and if he/she does not survive the term, the money is given to the nominee.
3. Health insurance policy:
This policy assists policy holders by covering for medical expenses. All medical claims of the policyholder and/or their family members are covered under a health insurance policy. It covers for any health emergencies like cancer, tumour, surgery or Covid-19 etc, depending on the specific cover provided.
Recommended read – Types of life insurance policies.
How does term insurance work?
Once a buyer decides the policy term and the coverage amount, the premium for Term Insurance plan is estimated based on factors such as age, health, coverage value, policy term, etc. The policy premium remains constant throughout the policy term.
The premium can be paid at regular intervals or as a single lump sum payment. The policyholder can also decide the format in which coverage amount is to be received.
In case of the demise of the policyholder during the policy term, the insurance company gives out the coverage amount to the beneficiary of the policy.
If the policyholder survives the policy term, the coverage ends and there is generally no financial payment from the insurance company. However, if the policy includes survival benefits, the policyholder gets a lump sum amount at policy maturity.
At the end of the policy term, depending on individual choice, the policy can be renewed if the policy allows renewal. Generally, renewals are only allowed until the time the policyholder reaches the maximum age as defined by the insurer. In case of renewals, the premium is recalculated for the renewed term.
Term Insurance vs Life Insurance vs Health Insurance
Difference between these three insurance policies are as below:
|Benefit||Term Insurance||Life Insurance||Health Insurance|
|Coverage||Term insurance provides cover for the premature death of the policyholder during the policy term.||Life insurance coverage is available during policy maturity.||Provides for the medical costs that may be incurred within the policy tenure.|
|Duration||Between 10 to 30/45 years||Between 5 to 30 years||Between 5 to 10 years|
|Cheapest among all the insurance types with low and affordable premium||Premium costs are higher as compared to term insurance||Premium increases as the age of the policy holder increases|
|Payable – Only if the policy holder attains death during the policy term.||Payable – if the policy holder attains death or at the time of policy maturity, depending on the plan chosen.||No death benefits in case of the policyholder’s death during the policy term.|
|Tax Deductions available||Premium paid can be claimed under Sec 80C||Premium paid can be claimed under Sec 80C||Premium paid can be claimed under Sec 80D of IT Act|
Common benefits of these insurance policies
Some of the common benefits offered by all these insurance formats are:
|Payment process||All three allow one time premium payment or regular, depending on individual preference. The preference must be pre-decided and communicated by the policyholder to the insurance provider.|
|Purchase of the policy||All the policies can be bought online. Lower the policyholder’s age, lower will be the applicable premium.|
|Transferable||One can transfer these policies between insurance providers without incurring any extra cost.|
|Tax exemption||All the three policies can be used for tax exemption up to a certain amount under the Income Tax Act.|
Since the three policies mentioned above cater to different and unique needs of policyholders, they differ from one another as far as product characteristics are concerned. The choice between term insurance and other insurance policies is completely dependent on one’s specific needs.
It is very crucial to understand the basics of insurance policies before buying them, because an informed choice can reap far better results. While it is a fact that there can be no recovery from the loss of our loved ones, financial aid plays an important role in keeping the family intact. Therefore, while exploring options like term insurance, one must know its benefits and features measured against other forms of insurance.
- How much cover should I seek in a term plan?
The sum assured or cover in a term insurance depends on various factors, like the number of dependents you have, your affordability, the desired lifestyle of your family, children’s education, etc .
- How much should be the tenure of my term insurance?
The tenure of term insurance plans differs across insurers and is based on several factors. Most plans cover you till the age of 60 years. Depending on individual needs, you can extend or reduce the tenure.
- Can I buy both term insurance and another type of life insurance plan?
Yes, you can buy different types of life insurance plans depending on personal requirements.
- Can death benefit be availed from both a term plan and a money-back plan in case of a life insured’s death?
Yes, in case of death of the policyholder, the nominee would receive a death benefit under both term plan and money back plan if invested.
- Are all the benefits received from life insurance plans tax free?
There is no limit on claiming tax exemption for benefits received under life insurance plans. Any death or maturity benefit received from life insurance policies are completely tax-free in the hands of the nominee, subject to certain conditions. Any money received from a life insurance policy where the premium is more than 10% or 20% of the sum assured is fully taxable.