Difference between term insurance and life insurance

Introduction

Life insurance is a crucial tool for protecting the financial future of your loved ones.

However, navigating through the various life insurance options can be overwhelming, leaving many individuals perplexed about which plan best suits their needs. Two primary categories of life insurance policies often confuse people are "term insurance" and "life insurance." This blog will demystify these concepts, highlighting their key differences, benefits, and how they cater to distinct financial objectives.

In this article, we will explore the fundamentals of term and life insurance, providing you with the clarity needed to make an informed decision about the most appropriate life coverage for your specific circumstances. Whether you are a young professional starting your career or a seasoned individual planning for retirement, understanding the nuances between term and life insurance will empower you to secure a brighter future for your loved ones.

What is Term Insurance?

A term insurance plan is a type of life insurance plan which covers the risk of premature death. In case of the insured's death during the policy term, the policy promises to pay a death benefit. Term insurance plans promise high coverage at low premiums allowing you to avail a high sum assured, which would be able to meet your family’s financial requirements in your absence.

Different types of Term plans:

What is Life Insurance?

Life insurance offers financial security to the policyholder's family in the tragic event of the policyholder's passing. Maturity benefits are another feature of a life insurance plan. The insurance firm receives regular premium payments from the policyholder, and in the event of the policyholder's passing, the insurer pays the nominee or the policyholder's family the sum assured.

Different types of life insurance:

What is the difference between term insurance and life insurance?

1. Premium

When compared to other insurance plans, term plans have the lowest premium costs. They only give the insured a death benefit, which makes them more cost-effective.

Whole life insurance premiums are more expensive than those for term insurance. This is so that whole life insurance can also give savings, wealth generation, and other advantages in addition to a death benefit.

2. Maturity benefits

Benefits paid out by insurance companies when a policy reaches maturity are known as maturity benefits.

If the policyholder survives the term plan, term life insurance plans do not offer any maturity or survival rewards. Some term insurance policies provide a return of premium option that reimburses the policyholder for the premiums they paid.

When purchasing life insurance, you can profit from both a death benefit and a maturity/survival benefit if the policyholder lives past the expiration of the plan.

3. Death benefits

Both term and life insurance policies have death benefits. These are the sums distributed to the beneficiaries upon the death of the insured. Both term and life insurance policies offer death benefits, however, because term insurance only covers death, it often offers a bigger sum than life insurance. Additional benefits are included in life insurance contracts, and the premiums paid also go towards supplying such benefits, reducing death benefits.

4. Paid-up and surrender Value

There is no paid-up value or surrender value for term plans. If you stop making premium payments, the plan will expire, and if you don't renew it, your coverage will end. You receive nothing in exchange for your previously paid premiums when the coverage is discontinued.

However, other life insurance plans still provide you with some advantages even if you stop paying premiums. Your policy would become paid up if you had maintained premium payment for the required minimum number of years before ceasing. A paid-up insurance would have a lower sum assured but would still be active. Additionally, you have the option to voluntarily end the policy by handing it in. You would receive a surrender value when you gave up control.

5. Flexibility

Both term insurance and life insurance give insurers a variety of options. For instance, investing in life insurance, which has a monetary value connected to it, assures that your family will be taken care of after your passing and enables you to use the policy during times of need. However, it is very challenging to cancel the life insurance coverage.

Term insurance products excel in this situation. Term insurance policies don't make any claims that you must finish the term to receive all the maturity benefits, unlike life insurance policies that do. Giving up the policy is as simple as ceasing to make premium payments.

6. Purpose

The main goal of term insurance is to protect the dependents' finances in the case of the policyholder's passing. In addition to providing protection, life insurance often includes an investment component for achieving wealth-building and other financial objectives.

7. Tenure

Term insurance is by definition offered for a set period, such as 5, 10, 15, or 30 years. However, whole life insurance products have adjustable terms and are often valid until the policyholder turns 100 years old.

8. Bonuses

Term plans do not offer rewards for continuing to make investments. It is purely a protection strategy. On the other hand, some whole life insurance plans reward policyholders for continuing to make investments with a variety of bonuses. These rewards2 take the form of guaranteed1 additions and loyalty additions.

9. Tax Benefits

Plans for life and term insurance are both eligible for tax advantages under sections 80C and 10(10D). You are eligible to deduct investments in term or life insurance up to Rs 1.5 lakhs from your taxable income. To maximize the tax benefits, you will need other investments, albeit term insurance premiums are typically lower.

Plans for life insurance also provide possibilities for cash flow and maturity advantages. According to section 10(10D), you are not required to pay taxes on the payouts you get from life insurance plans.

Who should choose the Term plan?

You should choose term insurance if you:

• You only need coverage for a certain amount of time: If you pass away while still having to make significant financial commitments, like raising children or finishing your mortgage, a term life insurance policy can replace your income.
• Not interested in using life insurance to build up a monetary value: By purchasing a less expensive term life insurance policy, you can save the money you would have spent on a whole life insurance policy and possibly invest it elsewhere.
• Want the most inexpensive protection: The least expensive alternative is term life insurance, particularly if you're young and healthy.

Who should choose life insurance?

You should choose Life insurance if you:

• Can pay the higher rates without difficulty: Because purchasing whole life insurance requires a lifetime commitment, you should make sure you can do so. Your coverage could expire if you fail to pay your premiums on time.
• Are looking for life insurance with a guaranteed cash payout: Whole life insurance policy’s cash values increase at a guaranteed rate decided by the insurer.
• Have a lifelong dependency, such as a disabled child: A trust that will take care of your child after your passing can be funded using life insurance. Obtain legal and financial advice before establishing a trust.
• Want protection that, in essence, lasts your entire life: Whole life insurance policies normally pay out their death benefits upon your passing. If you designate beneficiaries for your life insurance on your policy, the payout will be made to them directly rather than through your estate.

Conclusion

In conclusion, understanding the difference between term and life insurance is crucial for securing your family's financial future. Term insurance offers short-term coverage at affordable rates, while life insurance provides lifelong protection and potential cash value growth. Consider your life stage and financial goals to make the right choice and ensure your loved ones' security for the long run. Consult reputable advisors, compare quotes, and make an informed decision for a brighter tomorrow. Choose wisely, safeguard diligently, and secure your family's legacy for future generations.

Frequently Asked Questions