Term Insurance vs. Life Insurance: Key Differences Explained

Life insurance is a broad concept, and term insurance is one of its categories. Hence, the question is how term insurance differs from other insurance categories, especially endowment-based conventional life insurance.

What is Term Insurance?

Term insurance is a type of life insurance. It refers to a life coverage offered for a given ‘term’ such as 20, 30 or 40 years, depending on the policy conditions. You need to pay a premium in exchange for which you are given a ‘sum assured’, which will be paid to your family in case of your demise during the policy term.

For example, Abhishek is a 26-year-old who purchased a policy for 40 years at a premium of ₹ 12000 per annum. The sum assured is ₹ 1.5 crores. His nominees will receive the aforementioned amount if he passes away during the stipulated period. However, if he survives the 40 years, he will not typically receive anything.

With lower premiums, it offers a substantial sum assured, making it ideal for individuals seeking cost-effective financial protection for their dependents. You also receive a tax deduction under section 80C for the premium paid during the financial year.

What are other types of life insurance?

Besides term insurance, there are different types of life insurance, such as:

• Endowment Policy
• Whole Life Insurance
• Unit Linked Insurance Policy
• Children’s Plans
• Money Back Policies
• Retirement Plans

An endowment policy is also a popular form of life insurance. It is a type of policy where the insured pays regular premiums for a specific period, and the insurer pays a lump sum upon the policy's maturity or the insured's death, whichever comes first.

However, unlike term insurance, endowment-based life insurance policies do not have modest premiums. For a similar coverage of ₹ 1.5 crores, you might need to pay a significantly higher premium.

Let us focus on the differences between term insurance and endowment-based life insurance:

What are the key differences between term and life insurance (Endowment Plan)?

Here is a table explaining the key differences between term and life insurance (endowment plan):

What are the differences in premium and financial implications?

Endowment-based life insurance seems a better investment option because it combines savings and wealth creation with protection. However, it is critical to understand the difference between the premiums of the two alternatives and their relative impact on the policyholder.

Let’s take an example here. Aditya is a risk-averse investor looking for an insurance plan. He has the option of taking up term insurance by paying ₹ 12000 per year for 40 years. The sum assured shall be ₹ 1 crore.

On the other hand, a conventional endowment plan will insure a considerably lower sum. For having a death benefit of ₹ 1 crore, the monthly premiums can be significantly higher (up to 5-6 times the term insurance annual premium). Even though there are maturity benefits, paying a hefty premium for a similar cover might only be feasible for some investors. Aditya should understand that endowment-based conventional life insurance plans are more of a saving tool than a risk coverage alternative.

Who should choose term and endowment plans?

Term insurance is the best option for financial security and an affordable, low-cost alternative for your family. If you are a breadwinner with several dependents with existing and contingent liabilities, this can be an excellent tool for financial planning.

However, if you are willing to create wealth while not taking too many risks, life insurance (endowment) is one of the best options. This can be an excellent investment for anyone looking to attain long-term financial goals such as retirement savings, children’s education, or a dream house. Since the premiums and maturity amounts are tax-free, it gives an edge over other alternatives. Life insurance plans like whole life, or endowment policies are great for individuals who value financial security with disciplined savings.

Summing Up

There are pros and cons of term and endowment-based life insurance. The best advice is to keep some sort of insurance in your portfolio to safeguard your future and protect your family in emergencies and unfortunate events. You need to assess your financial goals, risk appetite, responsibilities, liabilities, and income streams before deciding between the two alternatives.