Term Insurance Vs Life Insurance

In today's world, almost every responsible family-oriented person wishes to protect his/her family from the vagaries of fate. But alas! There is no way to ensure that your family will always be kept away from tragedy. Hence, while there is no mechanism to eliminate future tragedies, there is certainly a way to pre-empt its financial consequences. It is known as Life Insurance.
Every person today must take life insurance to safeguard himself/herself and his/her family for the time of rising financial volatility. Stress levels are increasing daily as workloads rise and responsibilities line up. All of this leads to illness and diseases. Besides, one may meet with a freak accident and become unable to work. This event is extremely stressful for families that are dependent on the income of the one person who is now absent from their lives.
Thus, taking term insurance or life insurance is one of the best options to pursue. However, many potential customers are confused about the difference between term insurance and whole life insurance. In this article, we've compared term insurance vs life insurance on the basis of their features to enable you to decide what's best for you.

Term Insurance & Benefits

Term insurance is a type of life insurance that provides coverage for a specific period or "term." If the policyholder dies during this term, the death benefit is paid out to the nominated beneficiaries. However, if the policyholder survives the term, there is generally no benefit payable at the end of the term (unless it's a return of premium term plan).

Term insurance is the simplest and most affordable type of life insurance. It is designed purely for protection and does not have any investment or savings component, which makes the premiums relatively low compared to other forms of life insurance.

Benefits Of Term Insurance

• Financial Security:
  Like all life insurance, the primary benefit of term insurance is that it provides financial security for your family or dependents in the event of your untimely demise during the policy term. The death benefit can help them maintain their standard of living, pay for educational expenses, pay off debts, etc.

  
  

• Affordability:
  Since term insurance is a pure risk cover, it is often more affordable than other types of life insurance. This means you can secure a high coverage amount for a relatively low premium, making it a cost-effective way to get substantial life cover.

  
  

• Covers Death Globally:
  Term insurance provides a valuable benefit by offering global coverage for death, with the only exclusion being suicide within the initial year of policy acquisition. Apart from this exception, a term insurance plan guarantees# coverage for all forms of demise, irrespective of the location.

  
  

• 3-Year Claim Payout Guarantee^#:
  According to Section 45 of the Indian Insurance Act, 1938, if you have consistently maintained an insurance plan for three years, the insurance company cannot deny a death claim due to fraud, misrepresentation, or withholding of information. Essentially, once your term insurance policy completes the three year period, your family is assured to receive the claim amount in the event of your demise during the policy period, as long as you have been diligent in paying your premiums on time and policy is in force.

  
  

• Flexibility:
  Term insurance policies offer flexibility in terms of choosing the policy term, coverage amount, and payment frequency to suit your specific needs. You can also opt for additional riders like critical illness, accidental death, or disability to enhance your coverage.

  
  

• Income Replacement:
  In case of the policyholder's demise, the term plan can act as an income replacement tool, ensuring that the family's financial goals are not compromised.

  
  

• Peace Of Mind:
  Term insurance provides the assurance that your loved ones will be financially secure in case something happens to you during the policy term.

  
  

• Tax Benefits^*:
  Term insurance doesn't just offer financial protection; it also comes with tax benefits under the Indian Income Tax Act of 1961. When you pay your premiums, you can enjoy deductions under Section 80C, helping you save on taxes (up to Rs 1,50,000).

  
  

Additionally, if you've chosen health-related riders like critical illness, surgical care, or hospital care, you're in for more savings. The premiums paid for these riders qualify for tax deductions under Section 80D, depending on your age and the type of coverage you've selected.
And here's the added bonus: in the unfortunate event of your demise during the policy term, the term insurance payout to your family is tax-exempt under Section 10(10D).^** So, not only does term insurance provide a sense of assurance, but it also brings some welcome relief on the tax front.

Life Insurance & Benefits

Life insurance is a contract between an individual (the policyholder) and an insurance company (the insurer). Under this contract, the policyholder agrees to pay a specified amount of money (the premium) at regular intervals. In return, the insurer promises to pay a lump-sum amount (the death benefit) to the designated beneficiaries upon the death of the insured person.
Life insurance is essentially a financial tool that helps to mitigate the financial impact of the insured's death on their dependents. It's particularly valuable for those who are the primary earners in their families, as it can provide a financial safety net in their absence.

Benefits of Life Insurance

• Financial Security:
  Life insurance provides financial security to your family or dependents after your demise. The death benefit can help cover daily living expenses, pay off debts, or even fund future needs like your children's education or spouse's higher education.

  
  

• Debt Repayment:
  The death benefit from a life insurance policy can be used to pay off outstanding debts such as a mortgage, car loan, or credit card debts, ensuring that these financial burdens don't fall on your loved ones.

  
  

• Long-Term Goals:
  Some types of life insurance, like whole life or universal life, have a cash value component that grows over time and can be used to meet long-term financial goals such as buying a home or funding retirement.

  
  

• ** Legacy Planning:**
  Life insurance can also be used for legacy planning. The death benefit can ensure that your heirs receive a significant amount, or it can be donated to a charitable organisation of your choice.

  
  

• Loan Facility:
  Once a specific lock-in period has passed, certain life insurance policies offer the flexibility of being used as collateral for obtaining loans. This means you have the option to secure a loan using the value of your life insurance policy instead of resorting to traditional assets like your home, gold, etc.

  
  

However, it's important to note that not all life insurance policies extend this loan provision. For instance, term insurance plans do not offer the option of availing a loan against them.

• Accumulate Cash Value:
  In certain life insurance policies, a cash value is established as soon as you commence paying the premiums. This cash value becomes significant as your premium payments accumulate. The more premiums you contribute, the more substantial the cash value becomes. Importantly, this cash value can serve as a financial resource in times of urgency, providing you with the option to borrow money if you find yourself in a financial bind.

• Build Retirement Corpus:
  Planning for a serene retirement? Consider putting your money into retirement plans like annuity and pension plans. These plans offer either a lump sum or a consistent income flow throughout your retirement, ensuring financial security and stability. This approach allows you to retire without the burden of financial worries.

  
  

To enhance your retirement savings strategy, think about strategically blending in life insurance plans with maturity benefits, such as endowment policies, money-back plans, ULIPs, etc. Choose a policy tenure that seamlessly aligns with your planned retirement age to craft a solid financial plan for your golden years. It's a thoughtful strategy that paves the way for a comfortable and stress-free retirement journey.

• Tax Benefits^*:
  The annual premium paid towards life insurance is eligible for tax deductions under Section 80C of the Income Tax Act. You can claim deductions up to 1.5 Lakhs. And, the life insurance payout received by you or your nominee is also generally exempted from taxation under Section 10(10D)^**, subject to terms and conditions laid down in the Act.
  

Remember, the type and amount of life insurance you need can depend on many factors, including your age, health, financial obligations, life stage, and personal circumstances. It's important to periodically review your insurance coverage as your circumstances change to ensure you're adequately covered.
Now that you’ve understood about term and life insurance, it’s important to remember, both life insurance and term insurance serve the primary function of providing financial protection to your loved ones in case of your untimely demise. The choice between the two should depend on your specific financial goals, needs, and circumstances.

Life Insurance Or Term Insurance - Which Plan Should You Choose?

The choice between term insurance and life insurance depends on your individual financial situation, goals, and needs. Here are a few key factors to consider:

• Financial Goals:
  If your primary goal is to provide financial protection for your family in case of your untimely demise, then term insurance may be the best choice due to its high coverage for a lower cost. However, if you're looking for a combination of insurance and savings or investment, then life insurance policies like endowment plans, whole life insurance, or unit-linked insurance plans (ULIPs) may be more suitable.

  
  

• Budget:
  Term insurance typically offers more coverage for a lower premium compared to other life insurance policies. If you have a limited budget but require a high coverage amount, term insurance would be more appropriate. On the other hand, if you can afford higher premiums and are looking for a policy that also acts as an investment, then other forms of life insurance may be better.

  
  

• Duration Of Coverage:
  Term insurance covers you for a specific period, whereas life insurance plans like whole life insurance, as the name suggests, provides lifelong coverage. The latter can be beneficial if you want to leave an inheritance for your heirs.

  
  

• Investment Consideration:
  Term insurance is a pure risk cover and does not offer any investment component. If you prefer separating your insurance from your investment, you can opt for term insurance and invest the savings in premiums in other investment avenues. However, if you want a bundled product, certain life insurance products combine both.

• Flexibility:
  If you desire flexibility in terms of policy term, coverage amount, or insurance riders, term insurance may be a better option. Some life insurance policies, like ULIPs, do offer flexibility in choosing the investment component, but they may have higher charges.

• Risk Appetite:
  If you're risk-averse and prefer guaranteed^#returns, traditional life insurance policies like endowment or money-back plans could be suitable. On the other hand, if you're open to market-linked returns, options like ULIPs or a combination of term insurance and mutual funds could be considered.

  
  

While deciding, it's a good idea to clearly define your financial goals, understand your risk profile, assess your coverage needs, and evaluate the costs involved. It might also be helpful to consult with a financial advisor to make an informed decision. Lastly, whichever type of policy you choose, make sure you read the policy documents carefully and understand the terms and conditions when trying to make life insurance vs term insurance comparisons.