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Life Insurance vs Term Insurance in India

TeamAckoNov 2, 2023

Life insurance and Term Insurance are two popular insurance policies that provide financial protection to policyholders and their families. While both policies offer a death benefit to the beneficiaries, they differ in terms, coverage, and benefits. It is important to understand the differences between these two policy types before deciding which one to purchase, as each has unique features and benefits. In this article, we will discuss the importance of life insurance and term insurance and explore the key differences between the two policies to help you make an informed decision about choosing a suitable one.

Contents

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What is Life Insurance?

Life insurance is a type of insurance policy that provides financial protection to the policyholder's family in the unfortunate event of the policyholder's death. A Life Insurance Plan can also provide maturity benefits. The policyholder regularly pays a premium to the insurance company, and in case of the policyholder's death, the insurer pays a sum assured to the nominee or the policyholder's family. Life insurance plans come in different variants, including Endowment, Money-back, and Whole Life insurance plans. These plans provide financial protection to the policyholder's family and offer savings and investment benefits.

What is Term Insurance?

Term insurance is a type of insurance policy that provides financial protection to the policyholder's family in case of the policyholder's untimely death during the policy term. Unlike life insurance plans, Term Insurance plans do not offer any savings or investment benefits. They are pure protection plans that provide a high sum assured at a low premium cost.Similar to life insurance, in Term Insurance also, the settlement of the sum assured is made to the policyholder's family in the unfortunate case of the policyholder's death during the policy term. However, the major difference in Term Insurance schemes is that if the policyholder survives the policy term, they do not receive any payout.

Comparison of Life Insurance and Term Insurance

Now that we have understood what life insurance and Term Insurance are, let us compare these two types of insurance plans based on different parameters .

PARAMETERS

LIFE INSURANCE

TERM INSURANCE

Purpose

Life insurance plans offer both financial protection and investment benefits. These plans are ideal for individuals who want to secure their family's financial future and also want to save and invest for their long-term financial goals.

Term insurance plans, on the other hand, are pure protection plans that offer financial protection to the policyholder's family in case of the policyholder's untimely death. These plans are ideal for individuals who want to ensure that their family's financial needs are taken care of in case of an unfortunate event.

Coverage

Covers the whole life of the policyholder

Covers a specific term period chosen by the policyholder

Sum assured

Life insurance plans offer a lower sum assured compared to Term Insurance plans. This is because life insurance plans also offer investment benefits, and a portion of the premium paid towards the plan is invested in various investment options.

Term insurance plans offer a higher sum assured at a lower premium cost. This is because Term Insurance plans are pure protection plans and do not offer any investment benefits.

Cost of Premium

The premium cost of life insurance plans is relatively higher compared to Term Insurance plans. This is because life insurance plans offer both protection and investment benefits. The premium cost of life insurance plans is calculated based on the policyholder's age, health, lifestyle habits, and the sum assured.

Term insurance plans, on the other hand, offer pure protection benefits and hence have a lower premium cost. The premium cost of Term Insurance plans is calculated based on the policyholder's age, health, lifestyle habits, and the policy term.

Death Benefits

Pays out a death benefit to the beneficiary upon the death of the policyholder

Pays out a death benefit to the beneficiary upon the death of the policyholder only if the policyholder dies during the term period

Maturity Benefits

Provides a lump sum payout upon the maturity of the policy

Does not provide a maturity benefit as it only covers a specific term period

Term Period

Life insurance plans have a longer policy term compared to Term Insurance plans. Life insurance plans can have a policy term of 10 years, 15 years, 20 years, or even up to 30 years. The policy term of life insurance plans is decided based on the policyholder's financial goals and the amount of financial protection they require.

Term insurance plans have a shorter policy term compared to life insurance plans. The policy term of Term Insurance plans can range from 1 year to 40 years. The policyholder can choose the term of the policy based on their age and the sum assured.

Tax benefits

Premiums paid and benefits received are eligible for tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961

Premiums paid and benefits received are eligible for tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961

Flexibility

Offers flexibility to change the sum assured, premium amount, and policy term during the policy term

Offers limited flexibility as the policy term is fixed, and changes are not allowed during the term period. However, policyholders can choose to renew the policy at the end of the term period for a new term and premium rate.

Types of Life Insurance plans

As mentioned earlier, there are various types of life insurance plans. Let us have a brief introduction to those plans.

ULIPs: ULIP stands for Unit-Linked Insurance Plan, which is a type of life insurance policy that also offers investment opportunities. Under a ULIP, the premium paid by the policyholder is divided into two parts: one part is used to provide life insurance coverage, and the other part is invested in the market through a variety of investment funds, such as equity, debt, and balanced funds. The policyholder can choose the investment funds based on their risk profile and investment goals.

Endowment Insurance PlansEndowment insurance plans are a type of life insurance policy that provide both insurance coverage and savings opportunities. Under an endowment plan, the policyholder pays a premium for a specified term, which can range from 10 to 30 years or more. The policyholder is entitled to a sum assured or guaranteed payout at the end of the policy term, regardless of whether they survive the policy term or not.

Money-back Insurance Plans: Money back insurance plans provide periodic payouts to the policyholder during the policy term. These plans offer financial protection and also provide liquidity to the policyholder at regular intervals.

Whole Life Insurance Plans: Whole life insurance is a type of life insurance policy that provides coverage for the entire lifetime of the insured, as long as the premiums are paid on time. It is also sometimes referred to as permanent life insurance, as it does not have a set term or expiration date. Whole life insurance policies typically have higher premiums than term life insurance policies, but they also offer more comprehensive coverage and a savings component.

Child Insurance Plans: Child insurance plans are a type of insurance policy that provides financial protection and savings benefits for the policyholder's child. A portion of the premium is invested in various investment options. The policyholder’s family receives the sum assured along with any bonuses or returns at the end of the policy term or in case of the policyholder's untimely death. These plans also provide cash liquidity during the critical milestones of the child's education and other future expenses.

Retirement Insurance Plans: Retirement insurance plans, also known as pension plans, are insurance policies designed to provide financial security to individuals during their retirement years by providing a regular income to the policyholder after they retire.

The insurance company invests the premiums paid by the policyholder in various investment instruments to generate returns. At the end of the policy term or upon the policyholder's retirement, the insurer provides a regular income stream to the policyholder in the form of a pension.

Types of Term Insurance Plans

There are different types of Term Insurance plans available in the market, each designed to cater to different needs of the policyholders. Here are some of the most common types of Term Insurance plans.

Level Term Insurance

This type of Term Insurance provides a fixed sum assured to the policyholder’s beneficiaries in the event of the policyholder’s death during the policy term. The premium remains constant throughout the policy term.

Decreasing Term Insurance

The sum assured decreases over the policy term, usually at a fixed rate, while the premium remains constant. This type of policy is useful for those who have a specific debt, such as a mortgage, which decreases over time. This plan can be renewed.

Increasing Term Insurance

The sum assured increases over time, usually to keep up with inflation, while the premium remains constant. This type of policy is useful for those who want to ensure that the sum assured keeps up with the rising cost of living.

Renewable Term Insurance

This type of policy allows the policyholder to renew the policy at the end of the term, without having to undergo a medical checkup again.5. Convertible Term InsuranceThis type of policy allows the policyholder to convert the Term Insurance policy to a permanent life insurance policy, such as Whole Life or Universal Life, at the end of the term or at a specific point in time.

How to choose the right type of insurance plan?

Choosing the right type of life insurance for a person requires an assessment of their financial goals, income, expenses, assets, liabilities, and dependents. The right type of insurance can be chosen based on these factors, and the ideal percentage of amount spent on Term Insurance and Life Insurance will depend on the person's individual circumstances.Once the person's financial goals, income, expenses, assets, liabilities, and dependents have been evaluated, the right type of insurance can be chosen.

How to balance the cost between Life Insurance and Term Insurance? 

As for the ideal percentage of the amount spent on Term Insurance and Life Insurance, there is no one-size-fits-all answer. The amount spent on insurance coverage will depend on the person's financial goals, income, expenses, assets, liabilities, and dependents. However, experts recommend that a person should have a Term Insurance coverage of at least 10–12 times their annual income. In contrast, the coverage amount for Life Insurance should be based on the person's financial goals and dependents.

Frequently Asked Questions (FAQs)

Here are some answers to the most asked questions related to life insurance and term insurance.

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What are the tax benefits offered by Life insurance and Term insurance policies under Indian Income tax rules?

Under Indian Income tax rules, life insurance and Term Insurance policies offer tax benefits to policyholders. The premium paid towards these policies is eligible for tax deductions under Section 80C of the Income Tax Act. The death benefit received by the beneficiary is also tax-free under Section 10(10D) of the Income Tax Act.

What are the minimum and maximum age limits for buying insurance? 

The minimum age for buying an insurance policy is generally 18 years, whereas the maximum age limit differs based on the type of policy. For term insurance, the maximum age limit is usually around 65 years, while for whole life insurance, it can go up to 99 years.

Can I buy an insurance policy in my child's name? 

Yes, it is possible to buy an insurance policy in your child's name. Child insurance policies are designed to provide financial protection for children's future education and other expenses.

What are financial risks involved in investing in an insurance policy? 

One of the biggest financial risks involved in investing in an insurance policy is the possibility of the policyholder not being able to pay the premium. In such a case, the policy may lapse, and the policyholder may lose the benefits. Another risk is the possibility of the insurer going bankrupt, in which case the policyholder may not receive the promised benefits. It is important to carefully read and understand the terms and conditions of the policy before investing in it.

Can I purchase life insurance and Term Insurance online? 

Yes, you can purchase both life insurance and Term Insurance online in India. Many insurance companies offer online purchasing options, which are often more convenient and cost-effective than purchasing a policy offline.

What are the points I need to check before buying an insurance policy online?

Before purchasing a life insurance or Term Insurance policy online, it is important to compare the different policies and insurers to ensure that you choose the one that best fits your needs and budget. You should also read the policy documents carefully to understand the terms and conditions of the policy, including the coverage, premium payment schedule, and renewal terms.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes

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