Term Insurance vs Life Insurance: What’s The Difference?

When planning for your family’s long-term security, so your family never struggles financially in your absence, choosing the right life insurance plan is one of your most important decisions. With so many options available, it can feel overwhelming, but understanding the key differences can help you make a confident, informed choice. Two of the most common types you’ll likely encounter are traditional life and term insurance. Each serves a unique purpose and aligns with different financial goals. So, how do you know which one is right for you? 

This is why we break down the essentials of term insurance vs life insurance in this guide, so you can weigh the facts and make the best decision for your future.

Friendly reminder: It’s easy to get lost comparing policies and premiums. Instead of spending hours on it, why not get personalised insurance advice from Ditto? We offer free consultations with zero spam! Just 30 minutes to clarify all your doubts. So book a call now.

Term Insurance vs Life Insurance Overview

In this comprehensive comparison review of term insurance vs life insurance, we will explore:

• A clear breakdown of term and traditional life insurance highlights their core purposes—pure protection vs. savings + protection.
• Explore key features like death benefit, maturity payouts, premium affordability, tenure, and investment value.
• Coverage and benefits comparison to assess sum assured, flexibility, liquidity, tax perks, and add-on options.

This review offers a balanced guide to help you choose the right life insurance product for your needs in 2025. 

Term Insurance vs Life Insurance

Feature	Term Insurance	Traditional Life Insurance
Coverage	Death benefit only	Death + Maturity Benefits
Premiums	Low and Affordable	Quite High
Maturity Benefit	None (unless Return of premium option is opted)	Yes
Risk vs Savings	Pure risk cover	Combines risk cover with savings/investment
Flexibility	Decent with the help of add-ons and riders	Loans, partial withdrawals, and riders
Tenure	Fixed period (usually 5-40 years)	Flexible (up to 99 years)
Bonuses	NA	Yes, in some plans
Tax Benefits	Under Section 80C and 10(10D)	Under Section 80C and 10(10D)
Surrender Value	Minimal (In case of limited pay and ROP plans only)	Available but with conditions (builds up only after 2-3 years of premium payment as per IRDAI norms)

What is Term Insurance?

First things first, let’s understand what term insurance is. Term insurance is the simplest and most affordable form of life insurance. It provides financial protection for a specific period or “term,” and is designed to offer your nominees a death benefit or “sum assured” if you pass away during that time. One thing to note here is that it doesn’t include any savings or investment component, as its sole purpose is to provide a safety net for your loved ones. 

Example: Suppose a 30-year-old individual buys a term insurance plan with a sum assured of ₹1 crore (1CR), covering them until 60. Such a plan might cost just around ₹12,000 to ₹14,000 per year. This means that the insured’s family is financially protected for a relatively low annual premium, and a substantial payout is paid in case of an untimely death during the policy term.

What is Traditional Life Insurance?

On the other hand, traditional life insurance goes beyond just offering life cover. It combines insurance with savings or investment benefits, making it a comprehensive financial planning tool. For example, endowment plans (for savings) and whole life or unit-linked insurance plans (ULIPs) (for investment) provide both protection and financial growth opportunities. Unlike term insurance, these plans offer death and maturity benefits, making them suitable for those looking to build wealth over time while ensuring financial protection for their loved ones. 

For example, consider a traditional endowment plan for a 30-year-old individual with a sum assured of ₹10 lakh and a policy term of 30 years. The annual premium for such a plan might range from ₹35,000 to ₹40,000. If the policyholder survives the term, they receive the sum assured along with any bonuses declared by the insurer. If they pass away during the term, the sum assured is paid to the nominee.

So far, traditional life insurance sounds like a better deal- protection and savings, right? But it’s essential to look deeper into how these benefits work and whether they truly deliver better value for your money. 

Term Insurance vs Life Insurance: Key Differences

Now that you have a basic idea of what term and traditional life insurance are, let’s break them down. A straightforward comparison of their key features will help you understand which fits your financial goals better.

1. Cover Amount: Death benefit vs Death + Maturity

• Term Insurance is a pure protection plan. It offers a death benefit—a lump sum payout to your nominee if you pass away during the policy term. If you survive the term, no money is returned, unless you opt for a Return of Premium (TROP) plan, which refunds the total premiums paid (usually without any interest or investment growth). The cover amount in term insurance is typically much higher, often in the range of ₹50 lakh to ₹1 crore or more, making it ideal for securing your family's financial future at an affordable cost.
• Traditional Life Insurance, such as Endowment or Whole Life plans, combines insurance with savings or investment. These plans provide a maturity benefit if the policyholder survives the term and a death benefit if they pass away during the policy period. However, due to the added savings component and higher premium structure, the cover amount is generally lower, often limited to ₹5–30 lakh.

Ditto’s Take: If your main goal is financial protection, term insurance ensures high coverage at a low cost. The maturity benefit in life insurance often comes with significantly higher premiums. The returned amount will not hold any significant value in the long run due to inflation and declining purchasing power.

2) Premium: Low vs Higher

• Term insurance is significantly more affordable because it provides coverage exclusively for mortality risk during the policy term. Since there is no survival or maturity benefit (except in Return of Premium variants), and because the statistical probability of death during the insured term, especially for younger and healthier individuals, is relatively low, the insurer’s risk exposure remains limited.
• Life Insurance has higher premiums, including insurance and savings/investment components. 

Ditto’s Take: Term insurance often provides 20-30x or more coverage for the same premium as a traditional policy.

Note: Premium rates can vary based on age, smoking status, medical history, location, and insurer underwriting practices. 

3) Maturity Benefits: Usually none vs Available

• Term Insurance usually offers no payout on survival unless it’s a ROP plan.
• Conversely, life insurance guarantees a maturity benefit, which can appeal to those looking for guaranteed returns. 

Ditto’s Take: However, those returns are often lower than you could achieve through dedicated investment instruments like FDs, mutual funds, PPF, NPS Etc.

4) Risk vs Savings: Pure risk vs Risk + Savings

• Term Insurance is designed solely for financial protection. 
• Life Insurance combines risk coverage with long-term savings or investments. 

Ditto’s Take: Separating insurance from investment often results in better value and flexibility. When you keep life cover and wealth creation as two distinct goals, you can choose the best product for each: term insurance for affordable, high coverage, and mutual funds, NPS or PPF for better returns and liquidity. Bundling them together in a traditional plan often means compromising on both: limited returns and inadequate life cover.

5) Flexibility: Termination vs Surrender/Paid-up value

• Term insurance can be customized with riders, duration, and premium payment term, but generally lacks liquidity—you cannot withdraw from or surrender mid-term to get anything back.
• Life Insurance allows loans and withdrawals after 2-3 years and has surrender/paid-up options.

Ditto’s Take: Life insurance offers liquidity but often includes penalties or reduced benefits. Term plans are more straightforward.

6) Tenure: 

• Term Insurance is valid for a fixed period—usually 5 to 40 years.
• Traditional Life Insurance may offer coverage up to 99 years.

Ditto’s Take: While lifelong coverage may seem beneficial, most people don’t need life insurance for their entire life. The primary purpose of life cover is to replace your income, cover liabilities, and protect your dependents during your earning years. Once your key financial responsibilities—like your children's education, home loan, or retirement planning—are taken care of, the need for life insurance usually reduces. Term insurance aligns better with this reality by offering coverage only during the years when your absence would have the most significant financial impact.

7) Bonuses: 

1. Term Insurance offers no bonuses as it isn’t an investment product. 
2. Life Insurance may include bonuses depending on the insurer's performance. 

Ditto’s Take: Bonuses can look attractive, but they’re not guaranteed and may not significantly boost your returns. Besides, policy bonuses depend on investment returns, mortality experience, and insurer expenses. Moreover terminal bonus is only payable at maturity or death and not annually.

8) Tax Benefits: Both under 80C & 10(10D)

Both term and traditional life insurance policies provide valuable tax benefits under the old tax regime:

• Section 80C: Premiums paid on life insurance policies (up to ₹1.5 lakh per year) are deductible from your taxable income.
• Section 10(10D): The maturity or death proceeds are generally tax-free, subject to certain conditions, such as the premium not exceeding 10% of the sum assured for policies issued after April 1, 2012.

Important Note: (Post Budget 2021 and 2023 changes):

For ULIPs issued on or after February 1, 2021, if the annual premium exceeds ₹2.5 lakh, the maturity proceeds may not qualify for exemption under Section 10(10D). However, death benefits remain entirely tax-free regardless of premium size. Holding the policy until maturity is insufficient to retain tax-free status if the premium threshold is breached, unless the policy qualifies for exemption (e.g., part of a group insurance scheme).

From April 1, 2023, a similar rule applies for traditional savings life insurance policies (non-ULIPs). If the annual premium exceeds ₹5 lakh for policies issued on or after this date, maturity proceeds may become taxable. Death claims remain exempt from tax. These premium limits and tax changes do not apply to term insurance policies because term plans do not offer maturity benefits. Death payouts from term insurance remain fully exempt under Section 10(10D).

9) Surrender Value: None vs Available

1. In most cases, term insurance has no surrender value, so if the premiums stop, the policy lapses.
2. Life Insurance builds a surrender value over time, though early termination may incur losses. 

Ditto’s Take: Term insurance doesn’t tie up your funds unnecessarily—you have complete control over your investments elsewhere.

In this thorough comparison of Term Insurance vs Life Insurance, we can see that while traditional life insurance plans offer a blend of protection and savings, they come at a higher cost and often deliver modest returns. If your primary goal is to protect your family’s future without overburdening your finances, term insurance provides higher coverage at a fraction of the cost. It is a foundational pillar of sound financial planning. Covering the risk of an unforeseen demise early in life offers peace of mind and the necessary protection while allowing you to invest separately in higher-growth instruments like mutual funds, SIPs, NPS, or PPF for long-term wealth creation.

It’s a practical choice, especially for young professionals, new parents, or anyone looking to maximize their life cover while investing separately in higher-growth financial instruments like mutual funds, SIPs, etc. 

Ditto’s Take: If you seek value, simplicity, and robust financial protection, term insurance is an essential first step in building a secure financial future. It ensures that your family’s goals are protected, giving you the freedom and time to build wealth systematically and strategically through other dedicated investment avenues.

Key Features of Term Insurance

To understand Term Insurance vs Life Insurance better, let’s look at the key features of term insurance in more detail: 

No Maturity Benefit

In most term insurance plans, there is no payout if the policyholder survives the policy term. This means that if you buy a 30-year term plan and live beyond those 30 years, the insurer does not pay any money at the end of the term. However, you must note that some insurers offer Term Insurance with Return of Premium (TROP) variation.  In these plans, if you survive the term, the premiums you paid over the years are returned to you, though these plans typically come with higher premiums and significant drawbacks. 

2. Affordable Premiums

As term plans focus purely on providing life cover (without investment or savings features), they come with slightly lower premiums than traditional life insurance policies. This makes term insurance especially attractive for:

• Young Professionals
• Individuals with Dependents
• Anyone looking for high coverage at a low cost

For example, a healthy 30-year-old might get a ₹1 crore cover for a 30-year term at a relatively low annual premium of 12-14,000 p.a.

3. Flexible Tenure

Term insurance allows you to choose a policy duration that suits your financial responsibilities and life goals. Standard terms range from 10-40 years, or even more in some cases. This flexibility means you can align your coverage with:

• The time it will take to repay a home loan
• Your children’s education or marriage plans
• The age at which you plan to retire

Some term plans offer coverage up to 85 years, ensuring long-term financial security.

Types of Term Insurance Plans

To properly understand the difference between life insurance and term insurance, let’s now look at the types of term insurance plans available in the market:

1. Level Term Plan

This is the most common and straightforward type of term insurance. The sum assured remains fixed throughout the policy term, and if the policyholder passes away during this period, the nominee receives the full death benefit.

• Ideal for individuals seeking simple, predictable coverage.
• Best suited for long-term responsibilities like family income replacement or child education.

2. Increasing Term Plan

In this plan, the sum assured increases at predefined intervals, typically by a fixed percentage every year. This helps the coverage keep pace with inflation and rising financial responsibilities.

• Suitable for those expecting their liabilities (e.g., cost of living or children’s education) to rise over the years.
• Premiums may be higher due to the increasing coverage.

3. Decreasing Term Plan

As the name suggests, the sum assured reduces gradually over the policy term. These plans often cover loans or mortgages, where the outstanding debt decreases over time.

• This policy is best for individuals who want coverage specifically for a declining liability, like a home loan or car loan. However, they must be absolutely sure about the repayment timeline and that other liabilities will not pop up.
• This is an affordable option due to the reduced risk over time. The key features include lower premiums than regular term plans due to the decreasing risk exposure. However, there is no payout beyond the reduced sum assured at any point in time. 

Ditto’s Take: While Decreasing Term Plans can be a cost-effective way to cover declining liabilities, we generally do not recommend them as the primary form of life cover. They are usually not ideal for comprehensive family protection, as the cover may become inadequate over time if new financial responsibilities emerge.

4. TROP (Return of Premium Plan)

If the policyholder survives the term, this plan refunds all the premiums paid (excluding taxes and fees). While it provides peace of mind through a guaranteed return, the premium is significantly higher (70-100%) than standard term insurance.

• Appeals to those uneasy about “losing money” if they outlive the policy.
• It acts as psychological reassurance but may not offer the best return on investment. There is no profit or return on the money invested; it's just your money given back to you after deducting taxes paid to the government.

While each term insurance type serves a different purpose, standard term insurance remains the most cost-effective and widely recommended option for pure life cover. For those looking for additional flexibility, a whole life or TROP plan may add value, but at a higher cost. 

Note: While we've highlighted the key types of term plans, you can explore additional options available in India in our detailed blog post.

Pro Tip: Always choose your plan based on your current financial responsibilities and future goals, not just on the return value.

Types of Life Insurance Plans

Now that you’ve briefly gone through the difference between term insurance and life insurance, let’s look at the main types of traditional life insurance plans:

Feature	ULIP (Unit Linked Insurance Plan)	Endowment Plan	Whole Life Insurance
Purpose	Insurance + Market-linked Investment	Insurance + Savings	Lifetime Protection + Savings
Coverage Duration	Fixed term (10-30 years)	Fixed term (10-30 years)	Up to 99 years or lifetime
Investment Component	Yes (Equity/Debt Funds)	Yes (Low-risk savings)	Yes
Return Type	Market-linked, not guaranteed	Guaranteed + Bonuses might be applicable	Cash Value + Bonuses
Risk	High (depending on fund performance)	Low (capital remains protected)	Very low
Lock-in Period	5 years	Usually 2-3 years	3 years
Returns	Varies (8-12% historically on average)	Low (4-6% in the long run)	Low
Charges	High (allocation, fund management, mortality)	Moderate (admin + mortality)	Moderate (admin+ mortality)

1. Whole Life Insurance

As the name suggests, whole life insurance covers the policyholder's entire lifetime, typically up to 99 years.

• Death Benefit: Paid to beneficiaries upon the policyholder’s death.
• Cash Value: The plan builds a guaranteed savings component (cash value) over time, which the policyholder can borrow against or withdraw.

2. Endowment Plans

Endowment plans combine life insurance protection with a savings plan

• The death benefit is paid to the nominee if the policyholder passes away during the policy term.
• If the policyholder survives the term, a maturity benefit is paid out, which may include bonuses.

3. Unit Linked Insurance Plans (ULIPs)

ULIPs offer the dual benefit of investment and insurance. A portion of the premium goes towards life cover, while the rest is invested in market-linked instruments like equity or debt funds. 

• Returns depend on market performance.
• Offers flexibility to switch between funds based on risk appetite.

Ditto’s Take: If your primary goal is to ensure maximum financial protection for your family at an affordable cost, term insurance often emerges as the more practical and efficient choice. It allows you to opt for a high coverage amount without straining your budget, freeing up resources to invest separately in more flexible and potentially higher-yielding investment options.

4. Pension Plans (Retirement Plans)

These are long-term plans designed to help individuals build a retirement corpus.

• The policyholder receives a lump sum or a regular pension (annuity) on maturity.
• The nominee receives the death benefit if the policyholder dies during the accumulation phase.

Traditional life insurance plans are well-suited for those looking to combine life protection with savings or investment benefits. They offer the comfort of maturity payouts and long-term financial discipline. However, these benefits come at a higher cost, and the returns may not always match other standalone investment avenues.

Ditto’s Take: If your primary goal is to ensure maximum financial protection for your family at an affordable cost, term insurance often emerges as the more practical and efficient choice. It allows you to opt for a high coverage amount without straining your budget, freeing up resources to invest separately in more flexible and potentially higher-yielding investment options.

How to Choose Between Term and Life Insurance

Choosing the right life insurance plan is crucial in securing your financial future. The decision between term insurance vs life insurance depends on several key factors. Here’s how you can evaluate your options:

1. Financial Goals

• Term Insurance: Best suited for those looking for pure protection. It ensures that your family’s financial needs are handled if something happens to you, but it doesn’t offer a maturity benefit.
• Traditional Life Insurance: Combines insurance with savings or investment, making it suitable for individuals aiming to build a corpus for long-term goals like retirement, a child’s education, or marriage.

2. Budget and Affordability

• Term insurance offers high coverage at low premiums, making it ideal for those who want maximum life coverage without straining their monthly finances.
• Traditional Life Insurance: This insurance comes with higher premiums due to the savings/investment component, which may limit the sum assured for budget-conscious individuals.

3. Age and Life Stage

• Young Individuals with Dependents: Term insurance is recommended due to its cost-effectiveness and high coverage, especially when income grows. Ps. Starting early with a term plan helps lock in lower premiums for the entire duration. 
• Mid-Life or Pre-Retirement Individuals: Traditional plans may appeal to individuals who want to build a guaranteed retirement corpus or leave behind a legacy.

4. Dependents and Responsibilities

• If you have young children, a spouse, or aging parents, term insurance ensures their financial stability in your absence.
• If your family is financially independent, and your goal is wealth accumulation or estate planning, traditional plans may serve that purpose.

5. Risk Appetite

• Term Insurance: No investment risk—you're paying purely for life coverage.
• Traditional Life Insurance (e.g., ULIPs): Involves market or fund-related risks if linked to investment instruments.

If you’re looking for straightforward, affordable, and adequate life cover, term insurance typically provides better value for protection. You can invest separately in mutual funds, PPF, or other instruments to grow your wealth, without tying it to your insurance policy.

Ditto’s Take: Which One Should You Buy in Term Insurance vs Life Insurance?

Today, we mainly did this comparison piece on Term Insurance vs Life Insurance because at Ditto, we often get asked, “Should I go for term insurance or a traditional life insurance plan?” The honest answer is- it depends on your goals. But, if we had to break it down, here’s our take:

Always Start with Term Insurance

If your primary goal is financial protection for your family, then term insurance is the clear winner. Why?

• It’s significantly more affordable, allowing you to get a ₹2 crore cover for as little as ₹18,000–20,000 a year (for a 30-year-old).
• You get pure life cover—no mixing of investment, no hidden costs.
• You can buy a large enough cover (20–30× your annual income), which is essential if you have dependents.

In contrast, traditional plans—including ULIPs—often offer limited protection. For example, even in a better ULIP, investing ₹1 lakh annually typically gives you only ₹10 lakh (10 times) in life cover—hardly enough if you’re looking for serious protection.

Here’s Why We Don’t Recommend Traditional Life Insurance Plans

Traditional life insurance plans—such as endowment policies, whole life insurance, and money-back plans—combine savings with insurance. While they offer guaranteed returns and may look attractive on the surface, they come with a few key drawbacks:

• Low Returns: These plans usually offer 4%–6% returns, which barely beat inflation. If you want to grow your wealth, this is far from ideal, especially compared to other long-term investment options like mutual funds or PPF.
• Inadequate Life Cover: Traditional plans often limit life cover to 10× the annual premium. That’s not nearly enough to protect a family in a financial emergency, especially when term plans offer 20–30× of your annual income as cover at a fraction of the cost.
• Lack of Flexibility: Once you buy an endowment or whole life plan, you’re typically locked in for the long haul. Exiting early? You might lose a significant chunk of your premiums due to surrender charges or low paid-up values.
• Complex Bonus Structures: These plans often advertise bonuses (like reversionary or terminal bonuses), but these aren’t guaranteed and can vary widely. Plus, the structure is usually too complex to understand how and when you'll receive the benefits fully.

Here’s Why We Don’t Recommend ULIPs

ULIPs try to combine investment and insurance, but that often leads to compromises on both fronts:

• Lower Returns: Due to charges like fund management fees and mortality costs, ULIP returns often fall short of those of mutual funds.
• Limited Cover: Life cover is usually restricted to 10× the annual premium, which is insufficient for most families.
• Less Flexibility: ULIPs have lock-in periods of 5 years and complex structures, unlike mutual funds.

Instead, we recommend a simple, two-part strategy:

1. Buy a term insurance plan for robust, affordable cover.
2. Invest separately in a low-cost mutual fund or index fund to build wealth. 

This way, you get the best of both worlds: protection and higher returns without unnecessary complexity. 

So, who should consider traditional life insurance plans?

If you’re someone who:

1. Doesn’t have any dependents and doesn’t plan to have any in the future.
2. Isn’t eligible for term insurance plans due to medical or other underwriting reasons.

If so, certain traditional life insurance plans might make sense for you. But even in these cases, we recommend caution: carefully evaluate the returns, charges, and actual coverage before committing to a policy. 

Why Choose Ditto to Compare Plans

Choosing the right insurance plan can feel overwhelming with many options, fine print, and varying benefits. This is where Ditto steps in. Here’s how we make it easier:

• Transparent Comparisons: With Ditto, you can easily compare different term plans based on premiums, coverage, riders, and more. 
• Expert Guidance: Insurance terms can be confusing. Our team of advisors simplifies it all for you—breaking down complex clauses, explaining your options clearly, and helping you pick a plan that fits your life goals.
• Claim Data and Product Clarity: We don’t just show you flashy marketing numbers. Ditto gives you access to real metrics—like claim settlement ratios, insurer performance, and policy features—so you know exactly what you’re signing up for.
• Smart Tools: From our insurance calculator to personalised plan suggestions, Ditto provides tools that help you make smarter, faster decisions without pressure or bias.

Why Choose Ditto for Buying Term Insurance

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FAQs: Term Insurance vs Life Insurance

Final Thoughts & Summary on Term Insurance vs Life Insurance

Understanding the difference between term and life insurance is essential for making the right financial choice. While term insurance offers high coverage at low cost for pure protection, life insurance combines insurance with savings, often at higher premiums. When choosing between life insurance vs term insurance, your decision should reflect your financial goals, responsibilities, and appetite for investment. For most, starting with a term plan and investing separately offers the best balance of protection and value.