If the difference between term insurance and whole life insurance appears hazy to you, you're not the only one. While most individuals understand that life insurance pays a lumpsum amount to their nominees if they die, they may be unable to describe the distinctions and advantages of term life insurance and whole life insurance. However, if you want to better plan your family's financial future, you need to understand the fundamentals of these two alternatives.
How Can We Define Term Life Insurance?
A term life insurance policy is precisely what it sounds like: It is a policy that offers coverage for a set number of years, called the ‘term’, usually between 10 and 30 years. It is also referred to as "pure life insurance" since, unlike whole life insurance, it has no cash value component and is only meant to pay out to your dependents if you die during the term of the policy.
If you get term insurance to safeguard your family, consider if your family's need for life insurance may alter before the term is up. For most individuals, this means that the children are grown, and on their own, the house has been paid for, and there is some money set aside to provide a financial support system for the surviving spouse.
What is Whole Life Insurance?
A whole life insurance policy is the most basic type of permanent life insurance, so termed because it provides protection for the rest of your life as long as you pay your premiums or till age 100. It is not a "pure life insurance" policy, unlike the term insurance, because it contains a cash value feature. When a part of your premium amount is invested, the total increases overtime on a tax-deferred basis, so you don't pay taxes on the profits.
The cash value of insurance provides a number of benefits that you can enjoy while you are still living. It takes a few years for the cash value of your policy to develop into a significant sum, but once it does, you may borrow money against it in the form of loans or withdrawals, use it to pay your premiums, or even surrender it for cash to support you in your golden years.
Here are some of the benefits of whole life insurance.
- The premium is fixed for life.
- The death benefit is certain.
- The monetary value rises at a fixed rate.
What is the Difference Between Term and Full Life Insurance?
Choose a term plan if -
- You only require life insurance for a limited time. A term life policy might replace your income if you pass away while still having significant financial obligations, such as raising children or paying off your mortgage.
- You're looking for the cheapest insurance you can find. Term life insurance is unquestionably the most cost-effective option, especially if you are young and healthy.
- You're considering purchasing permanent life insurance but are unable to do so at this time. Many term life insurance policies can be converted to permanent life insurance at a later stage. Depending on the policy, the conversion date varies.
Choose a term plan if -
- You can afford to pay the additional premiums. You should be sure you can afford whole life insurance because it is a long-term investment. Your coverage may lapse if you do not pay your payments on time.
- You'd like to give your heirs money. Because the death benefit is given out regardless of when you die, you can utilise it as an inheritance. If you name beneficiaries on your life insurance policy, the proceeds will be paid directly to them rather than to your estate.
- Have long-term dependents, such as a disabled child. Life insurance can be used to set up a trust to look after your child when you pass away. Consult an attorney and a financial advisor before forming a trust.
- You want life insurance with a cash value that is guaranteed. The cash values of whole life policies increase at a guaranteed rate set by the insurer.
Term vs Whole Life – Features
|Choice of policy term||Yes||No|
|Typically, consistent premiums||Yes||Yes|
|Can be eligible for annual dividends||No||Yes|
Term Insurance Pros and Cons
To qualify for term life insurance, you may be required to complete a medical test, often known as a life insurance exam. Because the coverage amounts are so large, medical checkups are mostly necessary. Term life insurance rates are lower (depending on your age and overall health) than whole life insurance premiums since it is simple and does not develop cash value.
The cheaper rates for term life insurance plans are due to the fact that the coverage is only valid for a limited time. However, the cost of term life insurance is determined by a number of factors. They will, for example, differ based on whether you smoke or do not smoke, your age, and any pre-existing health issues you may have.
|Premiums are lower when you're younger||Offers temporary coverage|
|Bigger death benefits||You are required to re-qualify at the end of the term|
|Can be converted to a whole life insurance plan||Difficult to qualify in case of a significant health issue|
|-||Premiums can go up with every new term|
|-||No cash value|
Whole Life Insurance Pros and Cons
A benefit of whole life insurance is that the insurance cost is fixed for the duration of the policy. This feature is crucial since life insurance normally costs more as you become older and might be more difficult to qualify for. Locking in a low-cost premium early on can help you afford life insurance as you become older.
Most whole life plans, based on the issuer, do not need a physical check to qualify; instead, you must answer just a few health questions. If you have health difficulties, this may make it simpler to qualify.
Whole life insurance, like term life insurance, offers advantages and disadvantages. Here are a few to think about :
|Cash value||More expensive|
|Fixed premium amount||Smaller death benefit|
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
Consult with your financial advisor before making any decisions on insurance purchase.
Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time