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Term Insurance vs Life Insurance: Understand the Difference and Benefits

Term insurance and life insurance are two different types of insurance policies that provide financial protection to individuals and their families in the event of an unexpected death.

  • 23,331 Views | Updated on: May 22, 2024

With the cost of living skyrocketing by the day, insurance policies come as a blessing as they ensure that our family is secure in the future against an unfortunate event. Accidents or other calamities do not come with a warning. It might not be possible to avoid them, but we can certainly ensure that our family is equipped to deal with their aftermath.

Gone are the days when people thought that insurance was not that important. But in today’s time, it is not just important but an absolute necessity. Losing a loved one may be very difficult, but during such incidents, at least the financial part of the burden can be taken care of by the insurance policy.

But this does not stop the debate between Life insurance and Term insurance, and if you are also a part of this conversation, your search ends here. Read ahead to know all about it.

Term vs. Life Insurance: An Overview

Understanding the difference between term and life insurance is crucial for making informed decisions when choosing the right insurance coverage to protect yourself and your loved ones. Here is a brief overview to help you decide.

Aspects

Term Insurance

Life Insurance

Definition

Provides coverage for a specific term.

Provides coverage for the insured’s entire life.

Premiums

Typically lower but may increase as the insured ages or if they renew their policy.

Typically higher, but remain the same for the life of the policy.

Cash Value

Does not accumulate cash value.

Builds cash value over time, which can be borrowed against or used to pay premiums.

Death Benefit

Pays out a death benefit if the insured dies during the policy term.

Pays out a death benefit whenever the insured dies, as long as premiums are up to date.

Suitable For

People who need coverage for a specific period of time, such as while they have dependents or a mortgage.

People who want coverage for their entire life and may also want to build cash value.

Term Insurance vs Life Insurance

Is Term Life Better than Whole Life?

While whole life insurance can be a good investment for some people, term life insurance is generally the better choice for most people. Term insurance is more affordable, easier to understand, and more customizable, and it provides coverage when you need it most. When buying life insurance, be sure to compare both term and whole-life policies to determine which one is the best fit for you and your family.

What is a Term insurance?

Term insurance is a straightforward form of life insurance that provides coverage for a specified term or period. Unlike permanent life insurance policies such as whole life or universal life, which provide coverage for the insured’s entire life, term insurance offers coverage for a predetermined duration. If the insured person passes away during the term of the policy, the designated beneficiaries receive a death benefit payout.

Term insurance is known for its affordability and simplicity, making it a popular choice among individuals who want to ensure their family’s financial stability without breaking the bank.

Features of Term Insurance

To make an informed decision about term insurance, it is essential to understand the key features of term insurance. Here are some of the key features of term insurance that you should be aware of:

Affordable Premiums

Term insurance is one of the most affordable types of life insurance policies available in the market. Since it provides coverage for a fixed period of time, the premiums are generally lower compared to other types of life insurance policies.

Flexibility

Term insurance policies are highly customizable, allowing you to choose the coverage amount and the term period that best fits your needs. You can also opt for additional riders, such as accidental death benefits, critical illness coverage, and disability benefits, to enhance your coverage.

Pure Protection

Term insurance is a pure protection plan, meaning it only provides coverage in the event of your death. There is no savings or investment component associated with term insurance policies. This makes term insurance an ideal choice for individuals who are looking for affordable and straightforward life insurance coverage.

High Coverage Amount

Since the premiums for term insurance policies are lower compared to other types of policies, you can afford to purchase a higher coverage amount. This is particularly beneficial if you have a large family or dependents who rely on your income.

Tax Benefits

The premiums paid towards term insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Additionally, the proceeds received from the policy are tax-free under Section 10(10D) of the Income Tax Act, making term insurance a tax-efficient investment option.

What is a Life insurance?

Life insurance is a contract between an individual (the policyholder) and an insurance company. In exchange for regular premium payments, the insurance company promises to provide a financial benefit to the policyholder’s beneficiaries upon the policyholder’s death. This benefit, known as the death benefit or payout, is typically a tax-free lump sum payment that can be used to cover various expenses, such as funeral costs, mortgage payments, debt repayment, and the financial well-being of dependents.

Types of Life Insurance

Whether you are seeking coverage to provide for your family, accumulate savings, or plan for estate management, understanding the various types of life insurance is essential to make informed decisions that align with your unique circumstances and aspirations. Here is a brief overview of some of the popular life insurance policies.

Types of life insurance

Basic features

Level Term Plan

The premiums remain consistent throughout the policy’s duration

Increasing Cover

The coverage provided increases as one progresses through various life stages

Decreasing Cover

Coverage gradually reduces over the policy’s term

Return of Premium (RoP)

If you survive until the policy’s conclusion, the full premiums you have paid will be refunded

Convertible Plan

Policyholders have the flexibility to switch to a different insurance plan based on their requirements

Term Plan Plus Riders

By adding riders to a term plan, the basic coverage is augmented

Features of Life Insurance

While life insurance policies come in various forms, they all share some common features that make them valuable tools for financial planning. The following are some of the key features of life insurance:

Death Benefit

The death benefit is the amount of money that the insurer pays out to the beneficiary upon the death of the insured person. It is typically paid out tax-free and can be used to cover expenses such as funeral costs, outstanding debts, and living expenses for surviving family members.

Premiums

These are the payments the policyholder makes to the insurer in exchange for coverage. The premium amount is based on several factors, including the age, health, and lifestyle of the insured person, as well as the amount of coverage desired.

Policy Term

The policy term is the length of time that the life insurance policy remains in effect. It can be a permanent policy that lasts for the insured person’s entire life.

Riders

Riders are additional features that can be added to a life insurance policy for an extra cost. Common riders include accidental death and dismemberment coverage, long-term care coverage, and disability income riders.

Drawbacks of Life Insurance

While life insurance can be an important financial tool for protecting your loved ones, there are also some potential drawbacks to consider. Here are four of the most significant cons of life insurance.

Cost

The most significant drawback of life insurance is the cost. Life insurance premiums can be expensive, especially for those who are older or have pre-existing medical conditions. The premium payments can be a significant financial burden, especially for those with tight budgets.

Complexity

Another significant drawback of life insurance is its complexity. Life insurance policies can be difficult to understand and navigate, with many different types of policies and options available. It can be challenging to determine what policy is right for a particular individual or family, and the details of the policy can be difficult to interpret.

Exclusions

Life insurance policies may have exclusions that limit the coverage provided to beneficiaries. For example, if a policyholder dies due to suicide or as a result of a criminal act, the policy may not pay out to their beneficiaries.

Delayed Payment

Finally, life insurance policies may have a delayed payment timeline, leaving beneficiaries without the needed funds in the immediate aftermath of the policyholder’s death. Some policies require an investigation into the circumstances of the policyholder’s death, which can take time, delaying the payment of the policy’s benefits.

Final Thoughts

The term insurance vs. life insurance debate can go on. There is no right or wrong answer to the question. No matter which type of insurance you choose, ensure that you do your homework well and understand what both of these insurance policies include and exclude.

Comparing policies online can actually help you understand what is available and what suits you the best. A life insurance policy is very subjective to your personal requirements. Hence, study the available insurers well and make an informed decision by keeping your personal necessities in mind.

Key takeaways

  • The premiums paid towards term insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
  • Since term insurance provides coverage for a fixed period of time, the premiums are generally lower compared to other types of life insurance policies.
  • The premium amount is based on several factors, including the age, health, and lifestyle of the insured person, as well as the amount of coverage desired.
  • While whole life insurance can be a good investment for some people, term life insurance is generally the better choice for most people.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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