With the chaos in today’s world, it’s tough to ensure that your family is always safe. But you can plan for the financial consequences of any tragedy with life insurance. It may not eliminate future tragedies, but it can help lessen their impact.
Every person has to take life insurance these days to safeguard themselves and their family against the effects of financial volatility. The daily stress levels are increasing as our workloads rise and responsibilities line up. All of this leads to illness, disease, and injury. In the event that someone meets with a freak accident and becomes unable to work, this is traumatizing for their spouse and children.
Because many potential customers don’t know the difference between term insurance and whole life insurance, they incorrectly believe that one is better than the other. In this article, we’ve analyzed both types of policies to help you decide which is best for your situation.
What is Term Insurance?
Term life insurance is a contract between you and the insurance company where if you suddenly die, the company will pay your beneficiaries a specific cash sum. This type of protection is long-term so it’s an important consideration for your finances.
When you’re looking at term insurance, it’s important to know that term insurance is the purest form of life insurance policy. Term insurance offers comprehensive financial protection to your family members against life’s uncertainties.
What is (Whole) Life Insurance?
Choosing a whole life insurance policy or permanent life insurance can provide you with coverage up until death. The insurance stays in force throughout your whole life as long as you pay the premiums. How much coverage you receive is determined at the time of purchase and paid to the nominee when you die.
Usually, the maturity age of an endowment is 100 years old. If the life assured dies before this age, the nominee will receive the sum assured. However, if they live past 100 years old, then the insurance company pays out matured endowment to them instead.
Whether term insurance or life insurance is right for you depends on your specific situation. Let’s take a closer look at the benefits of each type to get you thinking.
Whether term insurance or life insurance is right for you depends on your specific situation. Let’s take a closer look at the benefits of each type to get you thinking.
1. Death Benefit –
Term life insurance is different than traditional life insurance because term life only gives you a death benefit if someone dies within the term period. Traditional life insurance offers both death and maturity benefits in addition to a term policy.
The death benefit in term plans is much higher than the maturity benefit offered by life insurance policies. Still, most insurance buyers invest in both to ensure a mix of life protection and investment returns. It’s always a good idea to have at least one term plan since it comes with the highest death benefit in the minimum premium amount.
2. Risk covered Vs. Savings –
Term insurance plans provide a death benefit to the insured’s family in case they die. Term insurance plans do not offer any survival benefits or maturity returns, like those offered by life insurance.
If you only care about the risk of your death and don’t want to pay high premiums, you may want to invest in term insurance. However, if you also want to build an investment corpus while getting a life insurance policy, it may be smarter to get traditional life insurance.
3. Flexibility –
Surrendering a term insurance policy is easier than surrendering a life insurance policy. In a term insurance plan, if you stop paying the premiums, the policy’s benefits end and it lapses.
However, it’s a different story when it comes to life insurance policies. If the insured surrenders before maturity, he/she may not recover the whole saving portions of their policy- here, premiums are paid back minus certain deductions. Moreover, most term insurance policy are renewable and have an option to convert into an endowment plan for the same sum assured at that time with an increased premium.
4. Tenure –
Term Insurance Plans offer coverage for a fixed duration, such as 5, 10, 15, or 30 years. Whereas whole life insurance plans come with flexible duration and are generally applicable till the life assured reaches 100 years of age.
5. Premium Amount –
Due to the fact that insurance buyers will be paying a higher monthly premium for higher coverage, most people won’t buy the coverage they need. Insurance policies also offer comparatively low returns on investment, between 5%-7%, which are further reduced if the policy holder surrenders the policy early.
If you’re looking for a cheaper and more affordable way to cover your family, term insurance plans are the best option. They provide high coverage at a minimal cost, which can’t be matched by whole life policies.
Example: If a 30-year-old person wants to purchase a life insurance policy with 10 lakhs assured for 20 years, the annual premium would be Rs. 3000. However, if this person is purchasing without-profit endowment policy with the same benefits, then the annual premium would be about Rs.30,000, and for with-profit endowment policy it would be about Rs.50,000 per annum.
6. Tax Benefit –
For many people, life insurance premiums don’t seem like a tax-friendly investment. This is because of the misconception that premiums are not tax deductible when purchased in India. It’s also assumed that any maturity benefits will be tax-free, but this isn’t always the case.
If you want to enjoy tax benefits and also get a cheaper insurance premium, then it might be best for you to invest in a term plan. The difference in premium between these types of plans can be invested in other tax-saving schemes like an equity-linked saving scheme (ELSS), a public provident fund (PPF), etc.
Conclusion
Life insurance and term insurance have many similarities, including the need for both to provide protection against a premature death. Term insurance is practical because it has a lower cost and doesn’t require you to plan for retirement in order to get it. Term life insurance is one of the most popular offerings on the market today.
