Term Insurance Vs Life Insurance: Know The Difference

The two major types of insurance policies available in India are term insurance and whole life insurance.
Term Insurance Vs Life Insurance: Know The Difference
Term Insurance Vs Life Insurance: Know The Difference
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A critical part of any family's finances is insurance. It protects against life events that can be financially devastating, such as the death of a breadwinner. The two major types of insurance policies available in India are term insurance and whole life insurance.

Moreover, when you’re looking to invest in insurance, it can be hard to know which type of policy is right for you. Term insurance vs whole life insurance is the classic debate but there are many differences between these two kinds of policies.

Term insurance plans are designed for people who don't want or need long-term coverage. It protects for a specific period at an affordable cost. They work well if your main concern is protecting your family financially in case you die unexpectedly.

On the other hand, whole life insurance provides both death benefit and savings accumulation, which make them ideal for long-term coverage. 

What is a Term Insurance Policy? 

Term insurance is a type of life insurance that covers the risk of premature death. If you pass away before the end of the policy term, the insurance company will pay the death benefit (equal to the sum assured of the policy) to your nominee. Term insurance is so-called because it has an expiry date, unlike permanent insurance policies. If you survive throughout the tenure, this policy will give you no benefits.

Because term life insurance is cheaper than whole life, lots of people choose to buy term insurance plans to cover their mortgage or other major expenses at a very efficient price. On the other hand, some policies also offer a Return of Premium (ROP) clause whereby the owner gets back the premiums he has paid while the plan was ongoing in case the policyholder survives throughout the policy tenure.

Term plans usually have a low monthly premium rate, which attracts a lot of young people. However, the premiums tend to increase as you progress through your life.

What is a Life Insurance Policy? 

A life insurance plan is an arrangement wherein the individual pays small amounts of premium at regular intervals to the insurance provider and in return, the insurance provider promises the insured a financial settlement upon death. If your family depends on you financially, you should invest in life insurance as soon as possible.

Life insurance plans are affordable and help prepare you financially for things like college funds, retirement, or other long-term goals. These plans are flexible enough for you to buy what you need now, without affecting your ability to pay your monthly expenses. It also makes sure that your loved ones will still be able to maintain the same lifestyle in their absence.

As the interest rates are low, many people who want to invest for their future are drawn towards investing in life insurance. Life insurance is a long-term investment product with a high rate of return. If you decide to invest in life insurance, the expected return is not only a death benefit but also a cash accumulation. Life insurance can also be used for tax savings and retirement planning.

Difference Between Term Insurance and Life Insurance

  1. Death Benefit 

The most common difference between these two types of insurance is that a term plan only offers protection in case of death during the term period while a whole life plan offers both protection against death and maturity benefit. The benefit provided by the death claim is higher for term insurance than it is for permanent insurance. Most people who want life protection also want investment growth, so they prefer buying life insurance. However, it's still advised to have at least one term plan as it offers death coverage at very nominal rates.

  1. Risk Coverage and Savings 

A term life insurance covers your dependents financially in case of your death, but it does not pay out any dividends over the years as whole life plans do. With that said, if you cannot afford to pay high premiums, you should consider investing in a term plan and enjoy the death benefit associated with it. However, in case you also want to create an investment corpus in addition to a life cover, you should invest in a traditional life insurance policy instead.

  1. Flexibility 

With term insurance, if you stop paying the premium for your coverage, your coverage will terminate. On the other hand, the maturity benefit of a life insurance policy is generally payable if the insured completes the term of the policy, that is, for most policies, this will mean paying all premiums. If the policy is terminated or surrendered before this then no maturity benefit is obtained. Although you may still receive the premiums you’ve paid towards the policy, they’re also subjected to certain deductions.

  1. Premiums 

To get a higher coverage under a life insurance policy, you're going to have to pay a higher premium. Most insurance buyers fail to get sufficient coverage because of high premiums. Life insurance policies generally offer low returns, between 5%-7%, which may be subjected to further deductions in case you choose to surrender the policy. On the other hand, term insurance plans are much more affordable than whole life insurance plans and provide higher coverage at a minimal cost. Anyone who doesn’t earn a steady income should go with a term insurance plan.

Bottom Line 

While there are many differences between term insurance and life insurance, the biggest difference is how they protect you. Term insurance can only secure your financial future for a certain period while life insurance will last until death. It’s important to know what type of coverage you need before you purchase any insurance policy.

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