Term Insurance vs Life Insurance

What is term insurance?

One of the most popular kinds of life insurance policies and plans in the country, term insurance is a plan that provides cover for a specific period to the life assured. A life insurance term plan is a plan where the nominee is paid the assured amount of money in case of the death of the life assured. Term insurance is cost effective. A term insurance policy generally provides higher coverage  in exchange of a nominal premium. A term insurance policy should be availed after using a term insurance calculator, and analysing what premium and what amount of money would be the best fit for you and your loved ones based upon your income.

Term insurance is a good choice for anybody at all - whether you are a person who lives alone, or somebody with a small or big family. Term insurance plans are particularly made for all kinds of people and families, and it does not matter whether there is only one bread earner in the family or multiple. A perfectly planned term insurance policy which meets all your requirements and makes sure that you live your life without being too worried about your family's financial security in difficult times.

What are different types of term insurance plans?

Now that you know the meaning of term insurance, let’s assess the different variants available. The different types of term insurance plans are as follows –

1. Level/regular term plan

   This is the basic form of a term insurance plan wherein the sum assured remains constant throughout the policy tenure. If the life assured passes away, the death benefit is paid.

2. Increasing term plan

   Under these plans, the sum assured increases by a pre-determined amount every year. If the life assured passes away during the policy term, the increased sum assured available in the year of death is paid.

3. Decreasing term plan

   Under these plans the sum assured reduces by a pre-determined amount every year. If the life assured passes away during the policy term, the reduced sum assured applicable in the year of death is paid.

4. Term with return of premium (TROP)

   These plans are a variation of the basic term plan but with a maturity benefit. If the life assured passes away during the policy term, the death benefit is paid. However, if the life assured survives the policy term, the premiums paid under the plan are refunded on maturity.

What are the benefits of term insurance?

Some of the benefits of term insurance plans are as follows –

1. Financial protection

   A term insurance plan is designed to provide financial security to your family in your absence. If you are the breadwinner, your sudden demise might cause a financial strain for your family members. However, with a term plan, the death benefit received can help your family financially to meet their needs and also to fulfil their financial goals.

2. Affordable premiums

   Term plans are simple forms of life insurance plans which allow you to choose higher sum assured levels at affordable premiums.

3. Tax savings

   The premiums paid for term plans qualify for tax deduction under Section 123(under old tax regime) of the Income Tax Act, up to ₹1.5 lakhs. The death benefit received is completely tax-free. Moreover, if you choose TROP, the premiums refunded on maturity can also be tax-exempt under Section 11 (read with Schedule II, Sr.No.2) of the Income Tax Act, subject to specific provisions.

What is life insurance?

Life insurance is a contract between the insurance company and the policyholder. Under the contract, the insurer covers specified financial risks of the policyholder in exchange for a premium.

Life insurance includes different types of plans, and each plan has a specific set of features and benefits that can help meet your different financial goals.

What are different types of life insurance plans?

Apart from the term insurance policy, there are several other types of life insurance plans that are available in India –

1. Unit Linked Insurance Plans (ULIPs)

   ULIP is a particular kind of insurance plan that is a long-term tool for investment. The minimum lock-in period of an ULIP is five years. This plan permits an investor to allocate money in different funds as per the investor’s choice and in line with the product terms and conditions.

2. Traditional Endowment Plans

   A Traditional Endowment Plan gives a policyholder a chance for savings. There may be bonuses available periodically, which are added up and paid on the maturity of the plan or after the death of the life assured.

3. Whole Life Traditional Endowment Insurance Plans

   This life insurance plan provides a whole life insurance cover to the life assured, up to a hundred years. The amount is paid to the nominee at the death of the life assured.

4. Child Insurance Plans

   A child insurance plan brings together the benefits of life cover and savings so that you can plan to achieve your child’s life goals.

5. Pension Plans

   A pension plan is to be availed for ensuring savings for a comfortable life after retirement. There are one-time payment as well as monthly or yearly payment options available in the pension plans.

6. Money-back plans

   Money back plans are traditional savings-oriented life insurance plans like endowment plans. However, while endowment plans pay a benefit of premature death or maturity, money-back plans pay periodic benefits in the form of money-back during the policy tenure.

What are the benefits of life insurance?

The benefits of life insurance plans are as follows –

1. Financial protection

   Most life insurance plans also cover the risk of untimely demise during the policy tenure. If the life assured passes away during the policy term, a death benefit is paid, which can help your family meet their financial needs even in your absence.

2. Different types for different needs

   As mentioned earlier, there are different types of life insurance plans which can be used to save and create a corpus for the different types of financial goals that you might have.

3. Helps in saving

   You can choose savings and investment-oriented life insurance plans like endowment plans, money back plans, and ULIPs to save and create a corpus for your financial goals.

4. Tax benefits

   The premiums paid for life insurance plans qualify for a deduction under Section 123 (under old tax regime) of the Income Tax Act. The death benefit received is tax-free, and the maturity benefit received is also tax-free under Section 11 (read with Schedule II, Sr.No.2) of the Income Tax Act, subject to specific provisions.

Difference between term insurance and life insurance

The difference between term and life insurance plans can also be seen from the table below –

Term insurance vs other types of life insurance plans

There are two broad ways or parameters to understand the differences between term insurance and other types of life insurance plans and policies.

1. Coverage

   In most cases of term insurance plans, the coverage is available only against premature death of the life assured. In case of a term insurance policy, the amount is paid only under the circumstance of the insured person's death within the tenure of the term insurance policy.

   In case of other types of life insurance plans, there is a certain amount of maturity benefit added. These plans not only pay in case of a premature death, but also provide a benefit if the life assured survives until the end of the tenure of the policy.

   Therefore, term plans and other life insurance plans are very different when it comes to the coverage.

2. Features

   However, in case of other life insurance plans, there are other features available. The endowment plan, for example, helps you to create a certain amount of money through the process of guaranteed returns. Other money-back policies with fluidity are available as well. There are child insurance plans that provide you with a corpus for your child for the times when you may not be there to look after the goals and dreams of your child. Unit Linked Insurance Plans, on the other hand, are there for you to help in generate market-linked returns.

The following are two major differences between term insurance and other types of life insurance -

1. There are no bonuses available in term insurance plans. On the other hand, other types of life insurance plans may have bonus component, depending on the plan terms and conditions.
2. Term insurance policy does not have paid-up values, unlike other plans such as endowment plans. 

Which one to choose according to your needs

There are a number of factors that you need to think over before deciding on which life insurance policy is perfectly fit for you. Life insurance term plans as well as the other kinds of insurance plans all have some relevance and benefits of their own.

A term insurance policy is for everyone because it provides financial security against premature death. Term insurance plans are one of the most popular and widely purchased insurance plans in India.

However, the other types of life insurance plans are particularly designed for different kinds of people with different requirements. You may look at the following to understand which plan is best suited for you depending upon your needs and targets -

1. An endowment plan is for people with a low risk appetite who wish to create a guaranteed corpus.
2. A pension plan is suited for people who wish to either create a retirement corpus or require regular income after their retirement.
3. A child plan secures the future of a child in the absence of their parents.
4. A money back plan is for those with a low risk appetite, who are looking for a guaranteed corpus but with liquidity.
5. A whole life insurance plan is for people who want a lifelong coverage.
6. A unit-linked plan is for people who wish to maximize their money with returns linked to the market, and with a high-risk appetite.
7. Therefore, a proper and close study of the entire term insurance vs life insurance plans would give you a detailed idea of the similarities and the differences between the two. Once you have understood what makes a term insurance policy different from other life insurance plans, it would be easier for you to realise which one is it that you need for your family's financial security.

Key takeaways

1. Term insurance and life insurance cannot be used interchangeably since these two terms are quite different from one another.
2. Life insurance is a broad concept which includes different types of plans, including term plans.
3. Term plans are protection-oriented life insurance plans that provide financial security.
4. Life insurance plans offer financial protection, along with helping you create a savings corpus for your financial goals.
5. You can choose between term and life insurance plans depending on your needs and financial goals.

Conclusion

Understand what term insurance and life insurance are. While the latter is a broad concept, the former is a subset within it. So, understand what is the difference between term insurance and life insurance plans and know their features and benefits. Choose a plan that matches your financial needs and helps you fulfil your financial goals.