Unexpected events in life can leave a person in shambles (physically, mentally, and financially). Because of it, insurance has become a need of the hour, especially, when a person has family responsibilities and his absence can be a cause for concern.
It helps him to manage risks, namely, hospitalization expenses for illnesses and various other emergencies. The most common types of insurance in this regard are traditional life insurance and term life insurance. Let's understand the peculiar features of both types of insurance policies.
Term insurance is a type of life insurance policy, where a specific benefit is paid if the insured passes away during the policy term. In case the insured survives the policy term, no maturity benefit will be paid. The policy doesn't have any savings component and its premium is based on the insured's age, health, and sum assured.
Based on the type of benefits that they provide, term plans are classified into the following types:
Level term plansTROP (Return of Premium) PlanIncreasing term planDecreasing term planConvertible term planTerm plans with riders
Traditional life insurance is a type of insurance policy that provides death benefits along with maturity benefits. The premium paid under this insurance is used for two purposes- savings and life coverage.
Based on the benefits provided, traditional life insurance plans are classified into the following types:
Whole life insurance Money-back policyEndowment planChild planUnit linked insurance planPension planInvestment plan
Many people get confused between the features of both these plans and are unable to match the suitability of the plan(s) with their circumstances. Let us compare term insurance with traditional life insurance to know the salient features of both types of policies.
Term insurance policies provide a death benefit if the individual dies within the policy term. No maturity benefit is provided under the same. The policyholder has the option to receive paid premiums if he goes with a TROP plan. However, in life insurance policies, if the insured dies during the policy period, his family will be provided the death benefit and bonus (if any). And if the insured survives the policy term, he can avail of the maturity benefit.
In terms of risk coverage, term insurance plans provide death cover. If the insured passes away, his family will get the sum assured. Since term plans only provide death coverage and no maturity benefits, the premiums are lower and the coverage is higher. Individuals who are concerned only about death coverage can purchase this policy. On the other hand, if an individual wants to build an investment along with death cover, then he can go for traditional life insurance policies, which invest a portion of the premium into investment and the remaining portion into death coverage.
A term insurance policy is much more flexible in terms of surrendering than traditional life insurance policies. To surrender a term insurance policy, the insured just needs to stop paying the premium, and then his policy cover and benefits assured under the policy terminates. However, with traditional life insurance policies, if an individual surrenders his policy before the completion of the policy term, then he will be able to recover only the paid-up value. Another point of being flexible is renewability. Term insurance plans can be easily renewed and can be converted to any other endowment by paying the necessary premiums.
Term insurance policies do not have a surrender value, and when the policy expires and is not renewed, there is no benefit provided to the individual. Hence, no portion of the premium is paid back, and the coverage stops. However, if the insured requires the payback of paid premiums, he can opt for a return of the premium term plan. For traditional life insurance, even if the premium payment is discontinued and the policy is voluntarily terminated before its maturity, the insured will be paid a surrender value (based on the number of premiums paid).
An insured cannot avail of a loan under his term insurance policy. This limitation is because term plans do not accumulate any cash value and generally expire during the end of the term. However, you can avail of a loan against your life insurance policy. The insurance company issues the loan based on the cash value of the policy as the collateral for the loan. However, an individual may have to wait for 3 years for his life insurance policy to accumulate a cash value, and the terms and conditions will spell out this clause separately.
The premium amount differs greatly in terms of term insurance and traditional life insurance policies. In term insurance plans, the entire premium amount is allocated for providing a life cover, while in life insurance, a part of the premium is allocated to life cover, and another is invested. As term insurance only provides a death benefit, the premiums are very low and provide higher cover. At the same time, traditional life insurance policies also provide a maturity benefit and have higher premiums. Many life insurance policies also provide low returns.
Premiums paid under both the policies are allowed as deductions under Section 80C of the Income Tax Act, 1961. Also, the death benefit is tax-free under Section 10 (10D).
|Point of Difference||Term Insurance||Life Insurance|
|Premium||Very low||Higher than term insurance|
|Death Benefit||Payable (no maturity benefits)||Payable (with maturity benefit too)|
|Maturity Benefit||Not payable||Payable|
|Coverage Amount||Higher coverage||Lower coverage|
|Paid-up/Surrender value||No paid-up or surrender value accumulated||Plan acquires a paid-up and surrender value|
Mr. Sam is a 32-year old IT professional who does well in his field of expertise. He is earning well and is investing his money prudently (considering his future needs). He also has a happy family with a housewife, and one daughter, and is responsible for taking care of his elderly parents as well, who are fighting illnesses.
Knowing his future needs and uncertainties of life, he chooses a life insurance policy (endowment) with a cover of Rs.15,00,000 and a yearly premium of Rs.45,596. His policy term is 30 years. He is assured that he has a plan that would protect him and his family from any future exigency. However, a slight change of thought is needed here.
Considering the number of risks that surround our environment, Sam should find answers to a few questions-
Today, education expenses are reaching new heights. An MBA course from a top B school cost Rs.25 lakhs. This will only increase in the next 10-15 years. The same goes for medical expenses as well. In 2021, a gall bladder surgery can cost you lakhs of rupees, putting a dent in your wallet. Who knows what the future treatment costs have for us. Therefore, it's fair to have a policy with enough sum assured, which protects you and your family for the next 30-40 years to come.
Another possibility would be purchasing a mix of whole life policy with a term rider. The whole life policy would keep his cash value accumulated, which will help him use the money during the policy term, and the term rider will help him with added benefits like life illness benefits, accident benefits, etc.
1. Do traditional life insurance plans allow an individual to build a corpus for children's future?
Yes, people can purchase child plans within a whole life insurance policy to build a corpus for their children's needs.
2. If I take a loan on my traditional life insurance policy, will this impact my future premiums?
No. Any loan that you take will not have any impact on your future premiums. However, the amount of the loan will be deducted from your sum assured.
3. I am planning to purchase a mix of term insurance and a money-back life insurance policy. Will I get the death benefit under both plans?
Yes, a death benefit is provided under both plans.
4. Is there a benefit of bonus under term and life insurance policies?
There is no bonus provided under term insurance plans. However, in endowment, money back, or child plans, you are entitled to bonuses and other specific bonuses.
Written By : Naval Goel
Last Updated : January, 2021
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