Understanding Term Insurance Plans and Life Insurance Plans
Life Insurance and term insurance serve different financial needs, but many people confuse the two. Life insurance offers both financial protection and, in many plans, maturity benefits. Term insurance provides a high life cover at a lower premium but pays only if the insured person dies during the policy term. Choosing the right option depends on your financial goals, family responsibilities, and budget. Understanding the key differences between life insurance and term insurance helps you select the coverage that best protects your loved ones and long-term financial future..
What is a Term Insurance Plan?
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 they provide, term plans are classified into the following types:
- Level Term Plans
- TROP (Return of Premium) Plan
- Increasing Term Plan
- Decreasing Term Plan
- Convertible Term Plan
- Term Plans with Riders
What is a Life Insurance Plan?
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, life insurance plans are classified into the following types:
- Whole Life Insurance
- Money-Back Policy
- Endowment Plan
- Child Plan
- Unit Linked Insurance Plan
- Pension Plan
- Investment Plan
Term Vs Life Insurance Comparison Table
| 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 |
| Flexibility | Not Flexible | Flexible |
| Maximum Term | 67 Years (18 to 85 Years Coverage Duration) | 71 Years (18 to 99 Years Coverage Duration) |
Difference Between Term Insurance and Life Insurance
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 life insurance to know the salient features of both types of policies.
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Death Benefits
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 they opt for a TROP plan. However, in life insurance policies, if the insured dies during the policy period, their family will be provided the death benefit and bonus (if any). And if the insured survives the policy term, they can avail of the maturity benefit.
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Coverage vs. Saving
In terms of risk coverage, term insurance plans provide death cover. If the insured passes away, their 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 they can opt for life insurance policies, which invest a portion of the premium and allocate the remaining portion to death coverage.
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Flexibility
A term insurance policy is much more flexible in terms of surrendering than life insurance policies. To surrender a term insurance policy, the insured just needs to stop paying the premium, and then their policy coverage and benefits assured under the policy terminate. However, with life insurance policies, if an individual surrenders their policy before the completion of the policy term, then they 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.
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Surrender Value
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, they can opt for a return of premium term plan. For 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).
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Loan
An insured cannot avail of a loan under their term insurance policy. This limitation is because term plans do not accumulate any cash value and generally expire at 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 collateral for the loan. However, an individual may have to wait for 3 years for their life insurance policy to accumulate a cash value, and the terms and conditions will spell out this clause separately.
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Premium Amount
The premium amount differs greatly between term insurance and 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, life insurance policies also provide a maturity benefit and have higher premiums. Many life insurance policies also provide low returns.
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Tax Benefits
Premiums paid under both 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).