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Having a life insurance cover is the foundation of sound financial planning. Over the years, as the life insurance industry has evolved significantly, the insurers are offering several policies ranging from pure protection to savings and retirement plans to suit the varying needs of the insurance buyers.
Amongst the host of life insurance policies, whole life insurance and term insurance remain popular. If you are a first-time insurance buyer, it is natural that you may feel confused about which type of policy is better and which one you must buy.
To make an informed decision, you must know about the difference between the two.
What is term insurance?
A term insurance policy, which is also commonly referred to as a pure protection plan, is the simplest form of life insurance. In a term plan, the insurance company offers a lump sum amount to the policyholder’s family member as a death benefit in the event of their unfortunate demise during the policy period. However, if the policyholder survives the policy term, they don’t receive any maturity or survival benefit.
What is a whole life insurance policy?
Whole life insurance is a comprehensive life insurance policy with a savings component, apart from offering death benefits. As the name suggests, whole life insurance lasts for an entire life, and you get a lump sum amount even if you surrender or discontinue the policy. This policy also allows partial withdrawal of the accumulated corpus.
Term vs Whole Life Insurance
The term and whole life insurance policy differ in several ways. Let’s analyse the differences in detail.
A term insurance policy comes with coverage for a fixed term. With a term plan, you have the flexibility to choose between long-term and short-term plans based on your specific requirements. The term plan also gives you immense flexibility in terms of renewability.
If you don’t want to renew the policy, you can stop the policy or discontinue it at any time you want. To discontinue, you must stop the premium payment, and the policy will automatically terminate.
On the other hand, a whole life insurance policy offers coverage for a more extended period. This helps you get financial protection for a longer period, and you can plan your other financial goals more efficiently. You can also surrender the plan in between or avail of a loan against the policy during an emergency.
The premium for a term insurance policy is the lowest amongst all types of life insurance policies. You can purchase a term plan with a high coverage amount at an affordable premium starting from Rs. 500 per month. And the premium you pay for the term plan is entirely used to provide financial protection to your family.
As compared to a term plan, the premium for a whole life insurance policy is much higher as the plan also has a savings component. The premium you pay for the policy will be returned to you along with the accrued interest upon the policy’s maturity.
Since a term insurance policy is a pure protection plan, it does not have any cash value.
In whole life insurance, a part of the premium you pay is used for offering protection, and the remaining amount is used for investment in other money market instruments. If the insurer earns profit from them, they declare a bonus which is given to you upon maturity.
Also, since whole life insurance allows you to build a corpus over a period, you can use the plan’s cash value to avail a loan against it at a low interest rate.
The truth is there is no such thing as ‘best insurance.’ Now that you are aware of the difference between term and whole life insurance policy, you must choose the one that suits your needs.
If you are a first-time insurance buyer, it is better to purchase a term plan. If you buy it at a young age, you can benefit from the affordable premium and get a policy with high coverage amount. It is an excellent way to protect your family from future uncertainties.
Make sure that you compare the different term plans online and purchase policy from a reputed insurance company like Kotak Life Insurance. Buying a policy online is simple. You must submit an application form, comply with the documentation and you will receive your policy documents after verification.