Difference between term insurance And life insurance

Life is uncertain, and we want to ensure our dependents continue living a comfortable life, at least financially, even after our passing. Life insurance is an instrument that helps create a financial corpus that can be useful in the future. Life insurance can broadly be divided into two types - term insurance and life insurance. Are you curious to know the difference between term insurance and life insurance?

Let us first understand what term and life insurance plans are! We will then look at the differences between them. 

What is a term insurance plan?

In simple terms, it is pure life insurance. The proposer (policy owner) pays the insurance regularly for a specific term (period). In an unfortunate situation of the proposer’s death, the beneficiary (nominee) gets the financial compensation if the proposer dies while the policy is in force.

Many insurance companies offer plain life insurance, whereas others offer optional riders. For example: accidental death benefit or critical illness coverage.

Different insurance companies offer various term insurance plans with various benefits. A few are listed below. This is, of course, not a comprehensive list.

• A level term plan offers the term plan with a uniform premium throughout the term. 
• Return on premium plan offers the return of the premium in case the proposer reaches the maximum age limit. 
• A convertible plan offers the facility to convert your term life insurance plan into other insurance plans as deemed by the proposer.

What is a life insurance plan?

This is a plan offering comprehensive life cover and saving components. A life insurance plan offers death cover to the beneficiary in case of the demise of the policyholder. S/he also gets returns on completion of the policy terms, known as maturity benefit.

The premium paid by the proposer is divided into two parts. One part gets allocated to life cover, and the other portion proceeds to savings and investments.

There are multiple types of life insurance plans offered by insurance companies with different and focused benefits. Although the list is long, some of them are listed below:

• Whole life insurance plan covers the proposer till death along with death benefits to the beneficiary.
• An endowment plan provides the death benefit to the beneficiary with the market returns based on the policy terms.
• Unit-linked insurance plans, also referred to as ULIP, offer a combination of death cover and investment benefits.
• Pension plans offer retirement benefits after a specific age.

What is the difference between life Insurance and term insurance?

Let us understand each one of them in detail.

Death benefit

A term plan provides the benefit only on the demise of the policyholder within the specified term period. The policyholder gets no benefit if death happens after the policy term completes. 

Traditional life insurance plans provide benefits in case of death with maturity benefits. Otherwise, the policyholder gets the policy maturity benefit on completion of the term.

Survival benefits and savings

The term insurance plan provides the nominee with a higher death benefit cover. However, no returns are paid if the policyholder survives the term. 

Life insurance plans help create a future corpus while providing the death benefit to the nominee. As part of it is invested in the market, you get the returns on maturity.

Tenure

One of the major differences between life insurance and term insurance is the tenure for which it is applicable. Term insurance offers coverage for a fixed period/age of the individual. It can have a fixed term such as 10, 15, or 20 years. One can also get the cover up to the age of 85 years in most cases.

Life insurance can also have a tenure. However, you can choose it for your whole life until you reach the age of 100 years.

Policy surrendering terms

Term policy is deemed to be surrendered or lapsed if you stop paying the premium. The benefits also terminate on policy surrender. 

Life insurance benefits can only be claimed after the decided term or maturity completes. If you wish to surrender the policy prematurely, you will only get back the paid premium amount post deduction of some administrative charges.

Premium amount

Although term life insurance offers higher benefits, it has a low cost. This is because no returns are offered at the end of the duration. 

Life insurance policies reap higher results if continued for a longer period. Although the death benefit is lower, the market returns can earn a good amount for the policyholder during maturity.

Tax benefit

Both policy premiums are exempted from tax deduction under section 80C of the Income Tax Act.

Conclusion

Both term insurance and life insurance have their exclusive relevance and benefits. Based on the differences mentioned above, one can choose the best plan after exploring various options available in the market. Although the traditional life insurance plan offers returns in the form of maturity and other benefits, it is advised to have at least one term insurance as the cover benefit is much higher than that of a life insurance plan.

Disclaimer

The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.