Term insurance offers affordable, high coverage without maturity benefits, while life insurance combines insurance with savings but has a higher premium.
Term insurance offers risk coverage without maturity benefits.
Life insurance is an important tool for securing your family’s financial future, especially if you are the primary breadwinner. Life insurance policies generally fall into two broad categories: term insurance and traditional life insurance. Although both serve the same basic purpose of providing financial protection in the event of death, they differ significantly in structure, costs and additional benefits. Deciding between the two can often be confusing, but understanding the differences will help you make an informed choice about which policy best suits your needs.
What is term insurance?
Term insurance is a straightforward life insurance plan designed purely for risk coverage. If the insured person dies during the policy term, it offers a predetermined amount (death benefit) to the nominee. However, if the policyholder survives the entire term, no payment is made. This no-frills structure keeps premiums much lower than traditional life insurance plans, making term insurance an attractive option for many.
Benefits of term insurance
- Affordable coverage: The biggest advantage of term insurance is its affordability. You can save a lot of coverage at a relatively low premium. For example, a sum assured of Rs 1 crore may cost you only Rs 500-1000 per month, depending on factors like your age, health and policy tenure.
- Flexibility: Term insurance plans offer various customized options, such as riders for critical illness, accidental death, or even premium waivers, which add more layers of protection for the policyholder.
- Maximum Sum Assured: Term policies typically provide a higher level of coverage than the premiums paid, making them a great choice for individuals looking for substantial financial security without breaking the bank.
Losses of term insurance
No Maturity Benefit: One of the major drawbacks is the lack of maturity benefit. If you survive the policy term, there is no payout. It may not appeal to those looking for a policy that acts as an investment and insurance tool.
Limited duration: Term insurance policies typically offer coverage for a fixed period of time, such as 20, 30, or 40 years, or until the policyholder turns 75. After that, the coverage ends, although many policies allow you to renew them.
What is life insurance?
Traditional life insurance policies, such as endowment or money-back plans, offer both insurance coverage and an investment component. Apart from death benefits, these policies provide maturity benefits if the policyholder survives the term, making them a combination of insurance and savings.
Benefits of Life Insurance
- Advantages of maturity: Life insurance policies are attractive because they offer a payout if the policyholder expires. This feature makes them attractive to those who want to combine insurance with an investment element.
- Savings and cash value: These policies typically build cash value over time, which can be earned during the policyholder’s lifetime. This makes traditional life insurance policies a viable option for those seeking long-term financial security and savings.
- Tax Benefits and Credits: Life insurance policies can provide tax relief under Section 80C of the Income Tax Act, while the accumulated cash value can be used as collateral for loans if needed.
Losses of life insurance
- Higher premiums, lower coverage: Premiums for traditional life insurance plans are significantly higher than term insurance. For the same premium, the coverage offered by life insurance is often much lower. For example, a premium that covers Rs 1 crore under a term insurance plan may provide coverage of only Rs 10-20 lakh under a conventional life insurance policy.
- Low profit: Traditional life insurance policies are often criticized for their low return on investment. While they offer guaranteed payouts, returns are usually modest compared to other investment options, such as mutual funds or stocks. The complexity of these policies can also make it difficult to understand where your money is going.
Which policy is more beneficial for you?
Deciding between term insurance and life insurance depends on your personal financial situation, goals and priorities.
Choose term insurance if:
- You’re looking for affordable, premium coverage to protect your family’s financial future.
- You are young, have dependents (such as children or elderly parents) or significant financial obligations such as a home loan.
- You don’t mind the lack of maturity benefits and prefer to focus on risk coverage.
Choose life insurance if:
- You can afford higher premiums and want a policy that combines both insurance and savings.
- You value the benefit of both death and maturity benefits, and you are interested in long-term financial security.
- You are looking for a financial product that offers potential tax benefits and the option to access loans against the cash value of the policy.
In either case, adequate coverage is crucial to ensure your family’s financial security in the event of unforeseen circumstances. Whether you choose term insurance or traditional life insurance, it’s important to evaluate your needs, risk appetite and financial goals to make the best choice.