Term Insurance vs. Health Insurance

When we say ‘financial planning,’ what comes to your mind? 

You might think of having enough savings in your bank account and investing the rest in stocks, bonds, mutual funds, etc., and for good reason. After all, a solid emergency fund ensures you’re prepared for unexpected expenses, and a well-diversified portfolio can help your money grow.

But there’s another important tool to help safeguard your finances – health and term insurance. Health insurance protects you from heavy hospitalization expenses, and term insurance replaces your income in case of your untimely passing.

The reality is that no matter how much we save, a black swan event — a sudden, unexpected catastrophe — can drain our bank account. This can deplete years of savings, just as the loss of a breadwinner can leave dependents financially stranded. This is why both health and term insurance are essential, albeit for different reasons.

In this article, we’ll break down what term insurance and health insurance are, their differences, and who should buy each to ensure financial security.

Friendly reminder: It’s easy to get lost comparing policies and premiums. Instead of spending hours on it, why not get personalized insurance advice from Ditto? We offer free consultations with zero spam! Just book a call to clarify all your doubts.

Term Insurance vs Health Insurance - What's the difference?

While both policies provide financial protection, term insurance secures your family’s future, while health insurance protects you from high medical expenses during your lifetime. So, with this out of the way, let’s take a more detailed look at both of them now:

Term Insurance

What is Term Insurance?
Term insurance is a pure protection life insurance policy designed to provide your family with financial support in the event of your untimely death. However, unlike other life insurance products, term insurance does not offer any maturity or survival benefits — it is a product that purely covers risk, with no investment or return component. The premise is simple: if you pass away within a specified period, the insurer will pay your nominees an amount, and this amount will act as your financial replacement for them

Features of Term Insurance:

• Death Benefit: If the policyholder passes away during the policy term, the insurer pays the nominee a lump sum or a staggered payment. This is called the death benefit. 
• Affordable Premiums: Compared to whole-life insurance plans, term insurance offers high coverage at a lower cost. Here’s why – for insurers, it’s a lucrative business model because they keep the entire premium if you don’t make any claim. For the policyholder, it’s a minimal expense that ensures mental peace, covering the worst-case scenario without straining their finances. Unlike health insurance, where premiums can increase over time, term insurance premiums remain fixed throughout the policy tenure. This is why it is recommended that you purchase a term insurance plan as early as possible.
• Riders: Additional benefits such as critical illness cover, accidental death benefit, waiver of premium, and disability cover can be added for enhanced protection.
• No Survival Benefits: If the policyholder survives the term, there is no payout unless a return of premium option is chosen (which increases premiums significantly).

Example:

If a 25-year-old non-smoker purchases a ₹1 crore term insurance policy for a 40-year tenure, the annual premium may be as low as ₹9,000 - ₹13,000. If they pass away during the policy tenure, their nominee receives the entire ₹1 crore cover amount tax-free u/s 10(10D) of the Income Tax Act, 1961.

Who Should Buy Term Insurance?

Term insurance is essential for people with financial dependents, ensuring their family remains financially stable even after passing. Here are some specific situations where term insurance is a must-have:

• If you have dependents: Whether you are married, have children, or support aging parents, term insurance provides a safety net in your absence. Even if you are young and do not have many dependents but expect it in the future, it is always better to pursue a term plan and lock in the lower premiums.
• If you have outstanding loans: A home loan, education loan, or business loan can burden your family if something happens to you. A term plan ensures your loved ones don’t have to liquidate assets to repay debts.
• If you are the primary breadwinner: Losing the primary income source can devastate a household. Term insurance replaces this lost income, helping dependents maintain their standard of living.

Since term insurance only covers death during the policy tenure, it does not provide financial support for medical expenses or daily expenses while the policyholder is alive.

Health Insurance

What is Health Insurance?
Health insurance covers hospitalization, medical treatments, and surgical expenses incurred due to illnesses or accidents. Unline term insurance, which transfers a lump sum amount, health insurance covers only the actual medical bills you incur. This is called indemnity, which is the primary concept behind health insurance.

Features of Health Insurance:

• Hospitalization Coverage: Covers expenses for in-patient treatment, surgeries, and ICU stays. Many policies also include domiciliary hospitalization and AYUSH coverage for alternative treatments.
• Cashless Treatment: Policyholders can avail themselves of cashless hospitalization at network/partnered hospitals.
• Pre- and Post-Hospitalization Expenses: Covers expenses such as diagnostic tests, medicines, and follow-up visits within a specified period.
• Restoration & Bonuses: Most plans offer restoration benefits, which replenish the cover amount after you claim for a hospitalization expense during the policy year. Insurers also provide bonuses for renewal and/or for a claim-free year.
• Additional Benefits: Some policies provide consumables cover, maternity benefits, OPD consultations, and wellness rewards, too.

Example:

If you undergo surgery that costs ₹8 lahks, a comprehensive health insurance plan with a sum insured of ₹10 lahks would cover the costs, leaving you with minimal out-of-pocket expenses.

Who Should Buy Health Insurance?

Health insurance is essential for everyone, as medical emergencies can arise anytime. Whether young or old, healthy or suffering from pre-existing conditions, having a health insurance policy ensures financial protection against rising healthcare costs.

Ideal for:

• Individuals and families: A comprehensive individual health plan or family floater policy can cover hospitalization expenses.
• Senior citizens: With age-related health concerns, senior citizen health plans ensure they receive quality treatment without financial burden.
• People with pre-existing conditions: Even if your options are limited due to existing health conditions, having some insurance is better than none.

Even if you feel healthy today, medical inflation means treatment costs could be significantly higher in the future. Buying health insurance early ensures lower premiums and continuous coverage without restrictions.

Which is More Important – Health Insurance or Term Insurance?

If you have dependents, term insurance is a must. It ensures that your loved ones are protected financially in case of your absence.

Health insurance, however, is essential for everyone, regardless of financial dependents. A single hospitalization could wipe out your savings without health insurance.

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Conclusion

If you have dependents or outstanding liabilities, term insurance is a must. However, regardless of your financial status, health insurance is non-negotiable as this is your first line of defense against high medical costs.

While some may argue that having enough savings can replace insurance, unexpected medical expenses or the loss of an earning member can wipe out savings far quicker than anticipated. A well-planned insurance portfolio ensures peace of mind, financial stability, and long-term security for you and your family. 

To put it succinctly, here’s the financial freedom trifecta: 

1. Liquid Savings are for emergencies,
2. Investments are for creating wealth and
3. Health & Term Insurance is for emergencies.