Insurance is a service that allows the insured individual to shift their risk to the insurer in order to keep the dependents in their family safe, secure, and assured about the future. Unforeseen risks and small accidents help us realise the significance as well as uncertainties of our life. Any individual can not avoid the risks and uncertainties, but can keep oneself protected and secured financially with the help of insurance.by doing so, the individual would be able to impact not only his/her own life but also that of their family. Life insurance plans compensate against the financial loss that is suffered in case of premature death, and also helps fulfil life goals effectively. Term plans are different from other types of life insurance plans pertaining to various aspects. Life insurance plans have many variants out of which term insurance plans are one of the types of these plans. It is important to understand what is life insurance vs term insurance as an informed buyer.
What is Term Plan?
A Term insurance plan is a type of life insurance plan for a fixed period of time/term. Once an individual buys a term insurance plan, he/she is insured for a particular period (term) of the plan. In case of the person’s demise during the term of the plan, the sum assured is paid by the insurance provider to the nominee of the policy plan. However, if the insured individual survives the term, no claim can be made. A term insurance plan thus offers no maturity benefits in case of the survival of the insured individual during the policy term period. However, it must be noted that a term insurance plan is the most affordable and economical plan.
A term insurance plan is of three types, which are as listed below:
- One-time premium payment term plan
- Partial premium payment term plan.
- Regular premium payment term plan
Each of the term plans can be further understood in a better manner as follows :
- The one-time premium payment term plan is the plan in which the premium amount is payable as a one-time lump sum amount.
- The partial premium payment term plan is the term plan in which the premium amount is paid only in partial terms.
- The regular premium payment term plan is the term plan in which the insured individual is required to pay the premium amounts in regular, periodic intervals.
Additionally, some insurance providers also include a Return of Premium (ROP) clause in the policy term that entitles the buyer to receive the premiums, that he/she has paid while the policy term was ongoing, after maturity of the plan. The advantage of this policy plan is the low rate of premium that also attracts many buyers who are usually belonging in the age group of 25-30 years. However, the policy buyers must keep into consideration that the rate of premiums keep on increasing with time in a term plan.
What is Life Insurance?
Life insurance plan is an arrangement wherein the individual purchases financial protection from the insurance provider by paying the insurance provider with small amounts of premium at regular intervals. By investing in a life insurance plan today, you can secure the future of your family. Life insurance plans are affordable and help prepare for the long-term future plans without any interruption. With the help of these plans, you can secure your future without disturbing your current financial goals. Moreover, life insurance plans help the policyholder to be assured of the maintenance of their loved one’s lifestyle in their absence. The rate of premium in a life insurance is high and fixed. Life insurance provides both death benefit as well as income benefit, and the cash accumulated over time can be retained and used at the discretion of the insured policyholder. This cash can even be used for premium deduction of be saved for retirement. Life insurance provides both financial security and life protection to the insured.
Life insurance plan entitles the subscriber to a pre-decided maturity benefit amount. In case of the demise of the policyholder during the policy plan term, the nominee receives the sum assured by the insurance provider. Life insurance is provided in the form of various policy plans as mentioned below:
- Money Back Plans : These types of plans provide guaranteed returns and serves as both insurance coverage as well as investment plans.
- ULIPs : Unit Linked Insurance Plans (ULIPs) are the plans that combine the benefits of investment as well as provide coverage with a lock-in period of five years. ULIPs offer tax benefits as well as various fund options for investment out of which the subscriber can choose as per their wish.
- Endowment Plans : These plans offer guaranteed pay outs and are offered in two formats, i.e. one with profit, wherein the additional bonuses are paid, and the other one without profit, wherein the bonuses are not paid.
- Whole Life Plans : Whole life plans are endowment plans that come with long terms of up to 100 years. The sum assured in this type of plan is payable to the nominee of the plan after the demise of the insured policyholder.
Difference between Life Insurance and Term Insurance
After understanding the basic meaning of both term insurance and life insurance, it is important to understand the difference between life insurance and term insurance to be able to choose the right policy plans. The difference between term and life insurance can be understood and determined based on the following aspects:
- Coverage : Term insurance plans offer coverage only against the premature death of the policyholder. Under most of the term plans, in such a circumstance, the benefit is paid only if and when the insured dies during the tenure of the policy plan. While this is the condition of returns in a term plan, in other types of life insurance plans, the policyholders also have the maturity benefit, along with covering the conditions of premature death.
- Premium : Term insurance plans only cover the risk of premature death, due to which it is available at a low and affordable premium rate. You can easily buy high sum assured levels at these affordable rates and gain greater benefits. Other life insurance plans have wider scope of coverage and also promise a high range of maturity benefit, due to which the rates of premium of these policy plans are higher.
- Coverage Duration : Term insurance plans offer longer term coverage period which can go up to 30 to 35 years of age of the policyholder. Other life insurance plans offer coverage for shorter durations as the tenure for these plans start from 5 years and goes up to 30 years.
- Bonus and other Additions : Term plans do not offer any kinds of bonuses or other kinds of additional benefits. In case of death of the insured, the basic sum assured is paid under term insurance plans. However, under other types of life insurance plans, bonus additions, guaranteed additions, loyalty additions, etc. are added.
- Paid-up and Surrender : Term plans do not offer any paid-up value or surrender value, that means that if the policyholder discontinues paying the premium, the plan would lapse and any coverage would not be received. Moreover, any returns from the paid premiums would also be not received. In other life insurance plans, the policyholder receives some benefits even if the premiums are discontinued. If the premium for a specific minimum number of years is paid, and then the premiums are discontinued, the sum assured that the policyholder would receive would be reduced but the policy plan would continue. The policyholder can voluntarily terminate the policy plan by surrendering it.
- Flexibility : Term plans are not as flexible as other life insurance plans, as they do not have any surrender value or paid-up value and also do not offer any maturity benefits. Life insurance plans, other than term plans, are flexible. They offer paid-up value and surrender value, as well as offers the option of availing policy loans.
The difference between term plan and life insurance can further be understood in a tabular form as follows:
|Covers only premature death
|Covers both premature death and survival until the policy tenure
|Low and affordable premiums
|Higher rates of premium than term plans
|Usually not payable
|Payable under most plans
|Payable under all plans
|Ranges from 10 to 35 years
|Ranges from 5 to 30 years
|No acquired paid-up value or surrender value
|If premiums are discontinued after a specified number of years, the plan acquires a paid-up value. If the plan is surrendered thereafter, a surrender value is paid
|Not very flexible
Which one to Choose- Term Insurance and Life Insurance
Both term insurance and life insurance plans have their own relevance and significance. Term insurance plans are a must for everyone as they provide financial security against the possibility of a premature death. By understanding the difference between term insurance plans and life insurance plans, one must choose the most relevant and right plan for themselves and their family. While term insurance plans are necessary for everyone, other life insurance plans have the following target audience in general:
|Type of Life Insurance Plan
|Individuals who have a low-risk appetite and want to create guaranteed corpus
|Money Back Plan
|Individuals who have a low-risk appetite, want to create a guaranteed corpus but also need liquidity over the term of the plan
|Whole Life Plan
|Individuals looking for a life-long cover
|Parents who want to create a guaranteed corpus for the future of their child
|Unit Linked Plans
|Investors who have high-risk appetite and wish to maximise their wealth with market-linked returns
|Individuals who want to create a retirement corpus and/or create a series of regular incomes post-retirement
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale
*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time’