How do Term Insurance and Life Insurance differ
Term insurance plans provide highly affordable premiums compared to life insurance plans and offer financial security to the policyholder’s family in the event of their unfortunate death. Unlike life insurance, which provides death, maturity, survival, and tax-saving benefits, term insurance only offers death and tax-saving benefits.
Let’s examine the difference between term and life insurance plans in India in 2024.
Life Insurance Vs Term Insurance
Using a table, let’s illustrate the difference between term and life insurance.
| Parameters | Term Insurance | Life Insurance |
|---|---|---|
| Premium | Premium rates are low | Premium of Life Insurance are higher than term plans |
| Death Benefit | Payable | Payable for all policies |
| Maturity Benefit | Generally, not payable | Payable under most of the policies |
| Coverage | The benefit is paid if you die during the policy term or survive till the end | You receive the benefit only if you die while your policy is still active |
| Policy Tenure | The tenure ranges from 5 -35 years | The duration can be anywhere from 5 to 40 years. |
| Flexibility | Not that flexible | Flexible |
| Loan Benefit | You can't get a loan benefit | You can get a loan from many life insurance policies. |
| Surrender value/Paid-up value | There is no surrender value or attained paid-up value | If you stop paying premiums after several years, the plan becomes paid-up. If you surrender the policy after that, you receive a surrender value. |
Understanding Term Insurance and Life Insurance Plans
Before we compare term insurance to life insurance, let’s grasp the distinction between term insurance and life insurance and what they mean.
Life Insurance
Life insurance plans offer death, maturity, and survival benefits. They provide security to your loved ones in the event of an unforeseen circumstance and allow you to build your wealth over time. These plans can assist you in achieving your lifelong goals and securing your post-retirement life. Although they have slightly higher premium rates than term insurance plans, they provide similar long-term protection.
Term Insurance
Term insurance, a type of life insurance policy, provides pure risk protection to the policyholder. This implies that these plans offer a death benefit to the family of the policyholder in the event of their unfortunate demise. They offer extensive coverage for various eventualities such as untimely death, critical illnesses, and disabilities. Term insurance plans are highly affordable and provide substantial life cover for an extended policy term. If you desire to receive an amount at the end of the policy term, you can choose term return of premium plans (TROP).
Term Insurance vs Life Insurance
In term insurance, the insurance company must pay the death benefit to the nominee or beneficiary if the policyholder tragically passes away during the policy tenure. No maturity benefit is provided if the life assured survives the policy term. On the contrary, in the comparison between term insurance and life insurance, life insurance plans offer dual protection and investment benefits for a specific term, which can extend for the entire life.
Let’s examine the contrast between the benefits of term insurance and life insurance to determine whether you should consider purchasing term insurance or a traditional life insurance policy.
Premium Amount
In term insurance vs life insurance, term insurance stands out for its affordability, providing substantial coverage at low premium rates. The sooner you purchase a term plan, the lower your premium rates will be. Conversely, life insurance premiums are slightly higher compared to term insurance.
For example, if a 30-year-old named Ram intends to purchase term insurance worth Rs. 1 Crore for a tenure of 30 years, he would only need to pay Rs. 818 per month. Conversely, a 100% guaranteed endowment policy offering the same coverage would entail a monthly premium of Rs. 20,902. You can easily calculate the premiums required using the term insurance premium calculator from the comfort of your home.
Among term insurance vs life insurance, term plans prove advantageous for individuals who cannot offer financial security to their families or lack a stable and secure source of income.
Cover Amount
The primary distinction between term insurance and life insurance plans is that term insurance provides only a death benefit if the life assured passes away within the term period, whereas a life insurance policy offers both death and maturity benefits to the life assured.
Risk covered Vs. Savings
In the comparison between term insurance and life insurance, a term insurance plan provides a death benefit to the family in the event of the policyholder’s untimely demise. However, term plans do not provide any survival benefits or maturity returns like life insurance plans. Therefore, individuals can consider purchasing term insurance if they only wish to cover the risk of death and cannot afford high premiums. Conversely, if someone desires to build an investment corpus along with life coverage, they should contemplate investing in a traditional life insurance policy.
Maturity Benefits
Unlike life insurance plans, term insurance generally does not offer maturity benefits. However, certain types of term insurance plans, such as term return of premium plans and 100% refund of premium plans, refund the premiums paid at the end of the policy term. Conversely, most life insurance policies provide maturity benefits upon outliving the policy term. You can explore the list of various life insurance vs term insurance plans available in India and choose the plan that best fits your needs.
Tenure
Term insurance plans provide coverage for a fixed duration, such as 5, 10, 15, or 30 years, which you can choose according to your needs. In contrast, whole life insurance plans in the comparison between life insurance vs term insurance offer flexible durations, which you can extend to cover up to 100 years of age.
Flexibility
Surrendering a term insurance policy is much simpler than surrendering a life insurance policy. In a term insurance plan, if the policyholder stops paying the premium, the benefits of the policy terminate, and the policy lapses. However, in life insurance policies, the maturity benefit is provided only if the policyholder completes the entire tenure of the policy. If the policyholder surrenders, they will not be able to recover the entire saving portion of the policy, as only the premium amount is paid back, with certain deductions.
Tax Benefit
Both life insurance and term insurance allow you to claim tax benefits under sections 80C, 80D, and 10(10D) of the Income Tax Act of 1961. Sections 80C and 80D apply to the premium paid, while section 10(10D) offers tax benefits on the death and maturity benefits.x
Additional Benefits and Bonuses
Another main difference between term insurance and life insurance is the absence of bonuses like terminal, revisionary, loyalty, or other accrued bonuses in term insurance plans. In contrast, these additional bonuses are included in life insurance plans according to the policy details. However, both term insurance and life insurance may offer additional benefits like rider benefits and life-stage benefits as per the terms and conditions of the policy.
Surrender and Paid up
When you buy term insurance, you forfeit your whole life policy. You do not acquire any surrender value or paid-up value. In the case of life insurance plans, if premium payments are discontinued after a certain number of years, the plan becomes paid-up. If the plan is surrendered after that, a surrender amount is paid.
Conclusion
When comparing the difference between term insurance and life insurance, both types of plans offer their benefits and relevance. Term insurance plans are essential for everyone as they offer financial protection against premature death. Understanding the difference between term insurance and life insurance plans enables individuals to select the most suitable plan for themselves and their loved ones.
Simply put, term insurance provides coverage for a specific period, while life insurance offers coverage for the entire lifetime.