Term Insurance vs Other Types of Life Insurance Plans
A road accident, a critical illness or a cardiac arrest – life is uncertain. Accidents can occur at any time, resulting in injuries, and even fatality. How much ever one tries to be careful, one cannot always avoid these risks and uncertainties of life.
In such a scenario, the best one can do is to invest in insurance that can financially secure their family members, if something happens to them. The best solution: life insurance.
However, life insurance is a board category, which has different types, such as term insurance, endowment insurance, money back policies, pure risk cover etc.
Quite simply, term insurance is a kind of life insurance or a subset of life insurance. Term insurance has similarities and differences with other types of life insurance plans. While other life insurance plans provide life risk coverage and also have maturity benefits for the policyholder, term insurance is a kind of life insurance plan for a specified period and provides benefits only to the nominees, upon the policyholder’s death.
Let’s learn more about term insurance and how it is different compared to other types of life insurance.
- Learn from examples
- What is life insurance?
- Types of life insurance plans
- What is term insurance?
- Types of term insurance plans
- Term plan vs life insurance plan – differences and similarities
Learn from examples
Suraj, aged 30, has a term insurance plan. The sum assured is Rs 30 lakh and he pays an annual premium of Rs 10,000. Take for instance, Suraj dies within a year of taking the policy, his family will receive the sum insured of Rs.30 lakhs in full. But if Suraj lives beyond the maturity date, he would not receive any benefit (only the premium paid in some cases) and certainly no maturity benefits.
On the other hand, Sanjeev aged 32, has an endowment life insurance plan. The sum assured is Rs 30 lakh, plus maturity bonus and benefits. Sanjeev pays an annual premium of Rs 1 lakh. If Sanjeev passes away after 10 years of initiating the policy, his family would receive Rs 30 lakh, plus accrued bonuses if any. If he lives till the end of the policy date, he would receive Rs 30 lakh plus the maturity benefits. This plan, although expensive, gave him maturity benefits – a kind of saving for his future life. These endowment policies also have surrender value after completing 3 years of existence while term plans do not have any surrender value.
These examples would have brought clarity about the basic features and difference between term insurance and other life insurance plans. Now let’s understand them in detail.
What is life insurance?
Life insurance plan provides death benefit as well as maturity benefit if the policyholder lives beyond the policy period. Since the benefits of life insurance are more, it is available at a higher premium. Life insurance is a kind of financial security for the policyholder’s family or beneficiaries upon the policyholder’s death.
Types of life insurance plans
Endowment plan – provides insurance cover and savings benefit
ULIP – provides return on investment along with insurance cover
Money back – provides period return and benefit of insurance cover
Term insurance – full coverage upon death of policyholder
Whole life insurance – insurance coverage till 100 years of age
Savings and investment – provides insurance coverage along with return on investments
Retirement plans – offer retirement corpus and insurance benefits
What is term insurance?
Term insurance plan is a type of life insurance plan. It provides death benefit only, upon the policyholder’s death. It usually does not provide any benefit if the policyholder lives beyond the policy period. They are pure protection plans. Since the benefit of term insurance is limited, it is available at an affordable premium. One of the reasons these term insurance plans have become popular is that investors need to keep their insurance and investments separate. Ideally, financial planners suggest to individuals to opt for term policy for risk cover and handle investment and wealth creation through mutual funds.
Types of term insurance plans
Level term plans – fixed sum assured and payout to the nominee upon the death of the policyholder
Return of premium plans – provide maturity benefit, premium are paid back if the policyholder survives
Increasing term plans – sum assured can be increased at an annual frequency
Decreasing term plans – sum assured can be decreased at an annual frequency
Convertible term plans – allows the plan to be converted to another plan
Term plans with riders – provides the option of buying riders such as critical illness cover, accident cover, or disability cover
Term plan vs life insurance plan – differences and similarities
Let’s look at the key features (differences and similarities) between term insurance and other types of life insurance plans
|Factor||Other Types of Life Insurance||Term Insurance|
The sum assured and bonus if accumulated upon the death of the policyholder. In case the policyholder lives beyond the policy period, it provides maturity benefit.
|The sum assured only and only upon the policyholder’s death. In case the policyholder survives beyond the maturity period, the total premium amount is returned.|
|Maturity benefit||Provides maturity benefit||There are term plans which may have a return of premium benefit upon maturity. Usually, there are no maturity benefits.
Surrendering a life insurance plan is complicated and may result in loss of money invested.
|Surrendering a life insurance plan is possible but complicated and may result in loss of money invested.|
|Premium||The premium amount is higher because the benefits are more. For e.g. the annual premium of an endowment life insurance plan of 30 years, sun insured 50 lakh, bought at the age of 30 years could be approximately Rs 1.5 to 2 lakh.||The premium amount is low considering the nature of the plan.
Term insurance plans have the lowest premium when compared to all kinds of life insurance plans.
|Tax benefit||Life insurance plans provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act on the premiums paid.||Like life insurance plans, term plans also provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act on the premiums paid. Term insurance also provides tax benefit on the death benefit received.|
|Coverage||Life insurance sum insured can be higher and flexible depending on the plan but comes at a higher premium compared to term plans.||Term plans can provide larger coverage at affordable premiums.
|Financial security||Life insurance plans, because more expensive, may not be able to provide complete financial security.||In term insurance plans, it is possible to have a higher sum insured as the premium is much lesser compared to life insurance plans.|
|Saving component||Some types of life insurance plans, such as endowment plan or money back plan have a saving component, which means they pay out benefits to the policyholders in case they survive.||Term plans, unlike other life insurance plans, do not have any savings element. They pay the benefit of sum insured only upon the death of the policyholder.|
Now that you know the similarities and differences between term and other life insurance plans, let’s look at the what and how of choosing a life insurance plan, including term insurance.
How to select a life insurance plan
- First, plan your finances. Set financial goals, factor in major expenses that you envisage, and the amount of money you and your family would need in the future.
- Next, look for different life insurance plans that will help you attain your financial goals and compare plans. Refer to the sections above about types of life insurance plans. Use online aggregators to set conditions and short list the best options.
- Once you know the kind of life insurance plan that you want to invest in, look for good insurance companies that offer the plan.
- Assess each and every factor of the policy – inclusions, exclusions, limitations, rules, sum insured, premium, death benefits, maturity benefits, and more.
- Make use of online calculators to get a clear picture of the premiums, bonuses, impact of inflation and the market on your investment.
- If you aren’t convinced or confused, get in touch with an insurance agent or expert to help you answer your queries and doubts.
- Last, but not the least, your insurance has to fit into your overall long term financial plan so take your financial advisor also into confidence.
Now that you know the similarities and differences between term insurance and other life insurance plans, let’s look at how to go about choosing a life insurance plan, and how it fits into your overall financial plan.
Over to you
Now you know; term insurance and other kinds of life insurance are just a small price to pay for the financial security of your family. It also guarantees you peace of mind. Instead of considering it as an expense, think of it as an investment, which is what it is. But what’s a plan without planning? Have you started your financial planning yet?
FAQs: Term insurance vs other types of life insurance
What is the difference between term insurance and life insurance?
Term insurance is a type of life insurance. There are some differences between term insurance and other life insurance plans. However, the major difference is that term insurance is for a limited term with return of sum insured only upon the death of the policyholder. It is a financial security for the family or dependents of the policyholder.
Life insurance plans provide more benefits - mainly sum insured as well as bonuses in some cases even in the case when the policyholder survives the period of the insurance coverage. Hence, life insurance plans are not just an investment for the family but even for the self as they have a savings element.
What are the pros and cons of term insurance plans?
Term insurance plans have many pros and cons; and how fruitful or pointless a term plan would be for an individual, depends on each individual’s need. That said, its pros and cons are almost equal in number but let’s look at them.
Term insurance is cheaper compared to other types of life insurance plans.
For individuals who are sole breadwinners of their families, term insurance provides a much-required financial security in case of the demise of the policyholder.
Term insurance plans provide the benefit of tax savings under Section 80C and Section 10(10D) of the Income Tax Act.
Although term plans are cheaper, because they are for a limited period of time (10 years or 20 years), buying a new term plan after expiry could be expensive due to inflation.
Term plans are typically fixed and not flexible, hence changing the policy period, sum insured, etc, may not be possible.
The policyholders do not get investment returns if they survive.