Insurance

The Differences Between Term Insurance And Life Insurance

Published

10 months ago

January 31, 2024

Silas

Life insurance policies not only help you build a long-term financial corpus for the future, but they also ensure that your family receives instant financial support if you die. There are two types of life insurance policies: term insurance and regular life insurance.

Here are the key distinctions between the two and which one you should include in your financial plan.

Term Insurance Plan:

Term insurance is one of the simplest and purest life insurance products. The family or nominee receives money only when the insured dies. No savings are included in term plans. Thus, they solely provide death payments and no survival benefits.

Many insurance companies offer riders like accidental death benefit and critical illness cover to expand coverage. One of the best things about term plans is their inexpensive premiums and extensive coverage. For a few thousand rupees, one can purchase a life cover of INR 1 crore.

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What are the Different Types of Term Insurance Plans?

Term plans have basic features; however, they are varied in terms of premiums, sum assured coverage and riders.

Types of Term Plans	Basic Features
Level Term Plan	Premiums are the same throughout the duration of policy
Increasing Cover	Assured coverage increases as per the different stages of life
Decreasing Cover	Coverage decreases over the duration of policy
Return of Premium (RoP)	Premiums that have been paid are returned in full if you survive till the end of the policy term
Convertible Plan	Can be changed to another insurance plan as per the need of the policyholder
Term Plan Plus Riders	Term plan with add-on riders increases the coverage of the basic plan

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Life Insurance Plan:

Life insurance policies provide considerable coverage for policyholders and their families. These insurance plans offer life cover and savings, making them more expensive than term plans.

One part of life insurance premiums goes to nominees’ death benefits, while the other to investing and saving. The best example is ULIP plans.

What are the Different Types of Life Insurance Plans?

Types of Life Insurance Plans	Basic Features
Whole Life Insurance Plan	Coverage is provided throughout the duration of policyholder’s life plus death benefits
Endowment Plans	Death benefit is given along with assured maturity benefits
Child Insurance Plans	Combination of insurance and investment which secures the child’s future financial needs
Unit-Linked Insurance Plans	Combination of life insurance and investment under a single plan
Pension Plan	Monthly income payout is given to the policyholder once they retire
Money-Back Plan	Pay back the maturity benefits in installments or in lump sum, once the policy term has ended

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Differences Between Term Insurance and Life Insurance

Parameters	Term Plans	Life Insurance Policies
Scope of Coverage	Very limited as it offers only death benefits	Offers both death and guaranteed maturity benefits
Premium Cost	High sum assured coverage with low premium rates	High premium rates
Policy Term	Ranges 10-35 years	Wider policy term with whole life coverage option up to 100 years in certain policies
Flexibility	Less flexible, can add riders to enhance the scope of coverage	Very flexible. One can avail loan facility, make partial withdrawals, pay additional premiums for more benefits
Surrendering the Policy	Easy to surrender. Once the death benefit is paid or you stop paying the premiums, the policy lapses	To receive the maturity benefits, one has to complete the policy term
Renewability	Term plans are renewable, and one can convert the policy into an endowment plan also	Option to renew the plan once the policy matures
Investment Opportunity	Pure insurance plan	One part of the premium is allocated to investment funds which ensures wealth creation
Death Benefits	Payable	Payable on all the policies
Maturity Benefits	No maturity benefit, with the RoP option, one can get back all the premiums paid	Offers assured maturity benefits along with the bonus, if any, to the insured
Policy Loan	No such loan facility	Certain plans offer loan facility against the policy
Taxation Benefits	Premiums paid are eligible for tax deduction under section 80C of Income Tax Act Death benefits received by nominees are tax-free under Section 10(10D) of the Income Tax Act	Premiums paid are eligible for tax deduction under section 80C of Income Tax Act Death and maturity benefits received by nominees are tax-free under Section 10(10D) of the Income Tax Act

Bottom Line

Life and term insurance have advantages as well as disadvantages. Life insurance products offer lifetime coverage, variable premium payment arrangements, assured maturity benefits, and flexible income payout alternatives for a higher premium. Term plans, on the other hand, provide only death benefit at a low cost and affordable premium.

Choosing an insurance for your portfolio relies on your financial goals and family’s financial health.

For more information: ForbesAdvisor