Term Insurance vs Life Insurance : Differences & Similarities
09 Jan 2020
A sound financial plan has a perfect blend of insurance and investment. When it comes to insurance, many people prefer opting for life insurance or term insurance plans available in the market. But it is easy to get confused between these two policies, mainly because both serve the same purpose – safeguarding the financial future of your family.
In this section, we will be discussing in detail what term insurance and life insurance plans are, what are the differences and similarities between the two, and which one should you select. Without further ado, let us begin!
About Term Insurance
A term life insurance plan gives you coverage for a certain number of years, and this usually comes with a fixed premium. The policy is the most basic form of a life insurance policy, offering the beneficiaries full coverage against the insured individual’s death. In fact, you can also enhance the scope of the policy with rider benefits such as accidental death cover or critical illnesses illness. One of the major plus points about term insurance is its affordability. Term insurance policies come at low premium prices, even while providing a large sum assured.
For instance, the Bajaj Allianz Term Insurance Plans available on Finserv MARKETS comes with a sum assured of Rs. 1 crore at low costs. The insured can also choose to extend the policy period if they were to outlive the chosen tenure. However, this facility usually comes at a relatively high cost.
In some cases, term insurance plans also provide a savings component. In the case of NOC claims made against the chosen plan variant/rider, the sum assured is returned in full at the time of maturity.
The Bajaj Allianz Life Smart Protect Goal plan available on Finserv MARKETS is one such plan. By opting for the Return of Premium option on the basic term plan, you can have your premiums returned to you at maturity. Term insurance plan is a prudent way to safeguard the future of your loved ones economically through competitive premium rates.
Types of Term Insurance Plans in India
The following variants of term insurance plans are available in the market –
Level Term Insurance Plan
Increasing Term Insurance Plan
Decreasing Term Insurance Plan
Return of Premium Term Plan
Convertible Term Insurance Plan
Term Insurance Plans with Riders
About Life Insurance
A whole life insurance policy has a broader perspective when compared to term insurance plans. Life insurance plans usually give you twin benefits by combining death benefit with a savings component or cash value that can be reinvested and tax-deferred.
Here, the premiums are split into two parts and are usually allocated flexibly. While one goes towards providing the death benefit to beneficiaries, another chunk of the premium is utilized for future wealth creation. Moreover, a life insurance policy gives you the freedom to invest a part of the premium amount into other instruments.
When you are young, the majority of the premium you pay is utilized in savings and investments. The remaining portion is used for providing life insurance coverage. You (the insured) have a say in what proportion of your premium is utilized for investments and what goes for life cover.
Types of Life Insurance Plans in India
The following variants of life insurance plans are available in the market –
Whole Life Insurance Plan
Endowment Assurance Plan
Unit Linked Insurance Plan
Term Insurance vs Life Insurance – Features
The following table will help you gain perspective on term insurance and life insurance features.
Term Insurance Plan
Life Insurance Plan
Coverage of the Policy
A basic term insurance plan only offers death benefits to the dependents of the insured.
Life insurance offers both death and maturity benefits to the insured.
Term insurance is the most affordable life insurance product available in the market.
Life insurance premiums are slightly higher compared to term insurance plans in India.
Term insurance offers death benefits to the beneficiaries of the policy.
Life insurance offers death benefits to the beneficiaries of the policy.
Ideally, the policy offers no maturity benefits if the insured outlives the term.
However, with the return of premium option, the insurer will repay the premiums paid towards the policy if the insured survives the tenure.
Life insurance usually offers maturity benefits to the insured.
It ranges between 10 years and 35 years.
It ranges between 5 years and 30 years.
The only flexibility that the term insurance plans offer is to enhance the scope of the policy with rider benefits such as critical illness cover, the return of premium cover, accidental death benefits, income return benefit, etc.
Life insurance plans are very flexible. You can avail loans on the plan, make partial withdrawals, and pay additional premiums.
Term Insurance vs Life Insurance – Benefits
The following table will help you gain perspective on term insurance and life insurance benefits in detail.
Term Insurance Plan
Life Insurance Plan
Risk Covered vs Savings
Term insurance plans cover the financial future of your loved ones, especially in your absence.
But the policy offers no benefits if you were to survive the policy tenure.
Life insurance plans will cover the family’s finances in case of your absence.
The policy also offers a facility to invest and build your wealth over time.
Surrendering of the Policy
Term insurance is easier to surrender. Once you stop paying the premiums, the policy terminates and lapses.
In the case of life insurance plans, you will have to complete the policy term to receive the maturity benefits.
So, if you decide to discontinue the policy before the completion of the tenure, you may not be able to retrieve the savings.
The insurer might return the premiums paid, but only after certain deductions.
Renewal of the Policy
Term insurance plans are renewable. In fact, you can also decide to convert the policy into an endowment plan.
Once the life insurance plan matures, you can renew the policy online.
You can claim tax deductions on the premiums paid towards the policy under Section 80C of the old income tax regime.
The death benefits received by the beneficiaries are tax-free under Section 10(10D) of the Income Tax Act, 1961.
Also, if you have taken critical illness cover, you can avail additional deductions under Section 80D.
You can claim tax deductions on the premiums paid toward life insurance plans under Section 80C of the old income tax regime.
Also, the maturity and death benefits received are tax-free under Section 10(10D).
Similarities between Term Insurance and Life Insurance
The only similarity between life insurance and term insurance plans in India is the tax benefits the policies offer. Both the plans allow you to claim income tax deductions on the premiums paid under Section 80C of the Income Tax Act, 1961. Also, the death or maturity benefits received are tax-free under Section 10(10D).
Term Insurance vs Life Insurance – What Should I Choose?
You need to evaluate a few things, no matter which insurance plan you choose. It includes –
Your current financial situation
Your current expenses
Your future financial goals
Based on the evaluation, you can then compare different term insurance and life insurance plans. Consider factors such as premiums charged, coverage of the policy, exclusions, rider benefits, etc. for comparison. In-depth research will encourage you to choose the right insurance policy to secure yours and your family’s future.
Both of these insurance plans are quite popular in India. Choosing between the two can be overwhelming. But if you evaluate your needs and try to align your future financial goals to each of these plans, you will be able to make the right decision.