TERM INSURANCE VS LIFE INSURANCE

Insurance policies are instruments that customers purchase to protect themselves and their loved ones. In the event of a contingency and unfortunate demise where the bread earner of the family is no more, these policies help provide for the family’s financial and survival needs. Apart from the protection and financial backing, one can also gain from tax deductions under section 80C of the Income Tax Act, 1961. Now the most popular question which arises while making a decision to opt for a policy is, whether to choose a life insurance plan or a term insurance plan.

WHAT IS LIFE INSURANCE?

Life insurance plans are comprehensive insurance plans that not only promise benefits on the maturity but also come with the flexibility of options of sum assured and tenure. The policyholder can opt for the maturity payout as a lump sum or in a staggered way, also a loan facility at a lower interest rate is also available. In crux, these give you financial protection for a lifetime.

THE REALITY OF LIFE INSURANCE

These insurance have a higher initial premium than an equal amount of term insurance. Here, the cost and value must not be confused. The life insurance buying decision and the positioning can be complex especially if the insurance is for business situations, estate planning, or complex family situations.

WHAT IS TERM INSURANCE?

Term insurance can be called one of the most basic types of insurance policies offered where the insurer ensures that the family members of the insured are given compensation up to the sum assured amount in case of demise of the insured during the selected tenure of the term insurance. These are designed to offer financial support to the family in case of an unfortunate event. Most term insurance plans come with other rider benefits which can be availed by paying an additional premium.

REALITY OF TERM INSURANCE

These policies are designed to last for a certain tenure/period. After this period cease to exist, many policies can be renewed on an annual basis at a high premium depending upon the age of policyholder and this might result in the policy premium becoming somewhat higher. However still, it will be the cheapest option among all insurance options available.

COVERAGE COMPARISON OF LIFE AND TERM INSURANCE

BASIS	LIFE INSURANCE	TERM INSURANCE
Duration	Whole Life	5 - 67 yrs(varies)
Guaranteed death benefits?	Yes	Yes
Guaranteed cash value?	Yes	No
Premiums	Level	May increase or stay level for the policy duration
Risks	No risk compared to other permanent types but insurees may find better investment options elsewhere	No risk of losing coverage
How does cash value grow?	By earning interest at a certain rate, or as per market behavior (if market-linked)	Not Available

PROS & CONS COMPARISON OF LIFE AND TERM INSURANCE

Pros:

LIFE INSURANCE	TERM INSURANCE
Does not expire, so insurees can keep it for as long as they need	No hidden fees, risks or exclusions
Works as a forced savings alternative	Policy can be canceled before it expires
The cash value component is fruitful for estate planning	Most affordable alternative

Cons:

LIFE INSURANCE	TERM INSURANCE
More expensive when compared to term insurance	Coverage expires at the end of the tenure so insurees will need to purchase a new policy or convert existing policy if in need of insurance.
Other investment alternatives offer higher interest rates
Surrender value of the policy changes with time

HOW TO MAKE AN IDEAL CHOICE BETWEEN THE TWO?

This question is very subjective and depends upon certain factors and parameters. The following listed factors will help you evaluate which policy is ideal for you as per your needs.

1. Tenure:

Term policies usually have a fixed policy term to avail benefits while flexible tenures are a feature of life insurance plans.

2. Premiums:

The premiums remain constant throughout the life insurance plan and in term plans, they may increase at the time of renewal. Also, it must be noted that the premium of a term plan will be considerably lower than that of life insurance.

3. Cash Value:

Premium paid toward life insurance doubles up as an investment. Your insurance provider can declare a bonus in case it makes profits and can also offer you a loan at lower rates. This loan amount is deducted from the sum assured. Whereas term insurance offers no such benefit but offers the most affordable option for life coverage. While opting for term insurance, individuals can consider other investment products like mutual funds for their investment needs as it will offer better & higher potential returns than any life insurance plan.

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