DIFFERENCE BETWEEN TERM INSURANCE AND LIFE INSURANCE

What is Term Insurance

Term insurance is at least partially life insurance that pertains to you for an agreed duration of time, known as a ‘term’ such as 10,20, 30 years. During this time, if the insured individual ends life, the recipient is awarded a death benefit payout.

On the flip side of hand, if the insured lives out the validity period, the liability coverage terminates, and no payment is made because it doesn’t offer lifetime coverage or accumulate monetary value. It is typically less expensive than permanent life insurance.

 

 

 

 

Features of Term Insurance

Following are the main characteristics of life insurance:

1) Guardianship of finances: It promises out dependents financial stability by paying out a lump sum payout or you can say it as a death benefit to beneficiaries in the case of the insured’s passing.

2) Premiums: Payment to maintain the policy’s validity, policyholders must pay regular premiums on a monthly, quarterly, or annual basis, age, health, policy type, and coverage amount are some of the variables that affect premium amounts.

3) Cash value (for policies that are permanent): Over time, permanent life insurance accrues cash value that can be accessed through withdrawals or loans. Cash value accumulates free of taxation. 

4) Adaptable Coverage: To strengthen coverage, more riders can be added including Premium Rider Waiver Critical, Illness rider, Accidental death benefit rider. 

5) Tax Benefits: Depending on local laws, premium paid and death benefits received may be eligible for tax deductions or benefits.

6) Adaptability:  A handful of policies provide opportunities to convert term insurance into permanent ones, variable premium payments, and the flexibility to change the level of coverage.

7) Components of investment and savings (Permanent Policies): Some policies let you accumulate money over time by fusing investment or saving alternatives with life insurance.

8) Loan in violation of policy: A perpetual life insurance policy’s cash value can be used as collateral for loans.

9) Managing risk: Risk administration in the event of an early death, life insurance acts as an anchor which mitigates financial risks for the insured’s family. From safeguarding the features of dependents to investing for long-term objectives, life insurance is a flexible product made to satisfy a range of financial planning requirements.

 

Types of Term Insurance Plans

1. Level Term Insurance Plan: The simplest form of term insurance where the sum assured (death benefit) remains fixed throughout the policy term. In this, premiums are generally fixed for the entire duration.

2. Increasing Term Insurance Plan: During the policy’s timeframe, the sum confirmed elevates at an appointed pace (e.g. yearly). It is designed to account for inflation and rising financial needs.

3. Decreasing Term Insurance Plan: The sum assured decreases over the time, often aligned with reducing financial obligations like loans or mortgages. It is suitable for individuals seeking coverage specifically for debts. 

4. Convertible Term Insurance Plan: Allows policyholders to convert the term plan into a permanent life insurance policy, such as whole life or universal life insurance, during the policy term.

5. Term Insurance Plans with Riders: Allows the addition of riders for enhanced coverage such as accidental death benefit, critical illness cover, Waiver of Premium.

6. Return of Premium Approach: Boasts an indemnification of premiums paid if the policyholder lives out the entire term of the policy. Typically, comes with higher premiums compared to regular term plans.

7. Group Term Insurance: Provides life insurance coverage to a group of people, such as employees in an organization. The coverage is typically uniform and comes at a lower cost due to group pooling.

 

What is Life Insurance?

Subject to the type of policy, life insurance you have pays out to a beneficiary either at the insured person’s death or after a predetermined amount of time. It is intended for guaranteeing the insured’s family or dependents with financial security by assisting them in paying for living expenses, debt repayment, or burial fees.

Features of Life Insurance

1) Guardianship of finances: It promises out dependents financial stability by paying out a lump sum payout or you can say it as a death benefit to beneficiaries in the case of the insured’s passing.

2) Premiums: Payment to maintain the policy’s validity, policyholders must pay regular premiums on a monthly, quarterly, or annual basis, age, health, policy type, and coverage amount are some of the variables that affect premium amounts.

3) Cash value (for policies that are permanent): Over time, permanent life insurance accrues cash value that can be accessed through withdrawals or loans. Cash value accumulates free of taxation. 

4) Adaptable Coverage: To strengthen coverage, more riders can be added including Premium Rider Waiver Critical, Illness rider, Accidental death benefit rider. 

5) Tax Benefits: Depending on local laws, premium paid and death benefits received may be eligible for tax deductions or benefits.

6) Adaptability:  A handful of policies provide opportunities to convert term insurance into permanent ones, variable premium payments, and the flexibility to change the level of coverage.

7) Components of investment and savings (Permanent Policies): Some policies let you accumulate money over time by fusing investment or saving alternatives with life insurance.

8) Loan in violation of policy: A perpetual life insurance policy’s cash value can be used as collateral for loans.

9) Managing risk: Risk administration in the event of an early death, life insurance acts as an anchor which mitigates financial risks for the insured’s family. From safeguarding the features of dependents to investing for long-term objectives, life insurance is a flexible product made to satisfy a range of financial planning requirements.

 

Types of Life Insurance Plans

1. Whole Life Insurance: Guaranteed everlasting coverage as long as premiums remain outstanding. Holds an economical value component that propels over time. Promotions both a death draw and savings/investments possibilities.
2. Endowment Plans: Unifies life insurance and savings. If the insured lives out the policy period, they will get a lump sum payoff at maturity. If the person who is covered ceases to exist within the term, his or her successors qualify for a demise benefit.
3. Unit Linked Insurance Plans (ULIPs):  Renders in tandem investments and life insurance. Premiums can be put between life insurance and market linked assets.Also maintains the potential for larger returns but comes with investing hazards.
4. Money-Back Policies: Throughout the policy’s life, a portion of the money insured is paid back at regular intervals. If the insured dies, the leftover proceeds are dispersed to their beneficiaries as an inheritance. Features both insurance and monthly income pleasures.  
5. Child Plans: Envisioned towards safeguarding a child’s future of capitalism.  Grants funding for significant milestones such as education and marriage. Shares a lumpsum payoff even if the parent (policyholder) dies during the policy period.

 

Difference Between Term Insurance and Life Insurance  

Despite the fact that both term and life insurance are versions of life insurance plans, their objectives, terms, and benefits are substantially distinct. It's an analogy. So, let’s understand term insurance vs. life insurance based on some key elements.

Term insurance

• Goal:  Enables beneficiaries of the policyholder monetary security in the unlikely circumstance that the policy policyholder passes away within the policy’s term.
• Duration: Relegated to an agreed upon length of time, such as 10, 20, or 30 years.
• Premium: Since, it solely proposes a death capitalize and no savings or investment component, premiums are lower.
• Payout: Shares beneficiaries with an inheritance if the insured passes suddenly within the policy’s term. Except in certain return-of-premium policies, no reward is paid if the policyholder lives.
• Investment Element: Zero cash value accumulation or investment.

Life Insurance

• Goal: Promises lifetime economic stability and might encompass an investment or savings component. As long as payments are paid, the policyholder receives reimbursement for the duration of their life.
• Premium: Higher premiums due to the inclusion of both a cash value component and an inheritance in the event.  
• Payout: When the policyholder dies, descendants can anticipate an unconditional settlement of the tragic passing benefit.
• Investment Element: Builds up cash worth over time that can be taken out or used as collateral.

We have studied the difference between term plan and life insurance; now let’s understand the primary elements that one needs to focus on while choosing an insurance plan.

 

How to Choose Between Term Insurance and Life Insurance

The term insurance and life insurance difference will help you to differentiate while choosing one of the two insurance types. Here we are presenting some key considerations to make a decision-

1. Affordability: Term insurance is appropriate for people seeking extensive coverage at a reduced price.
2. Long term requirement: People in search of lifetime coverage or a mix of insurance and savings would benefit more from life insurance.
3. Being flexible: While life insurance delivers other financial alternatives like loans or cash withdrawals, term insurance is clear cut and targeted.
4. Age: Young individuals can adopt term insurance as it is cost effective. Adults can go with life insurance in the perception of estate planning or leaving an inheritance.   

In short, term vs life insurance, choosing between the two, depends on your economic goals, budget, and personal circumstances. While electing an insurance plan, you ought to consider following points-

Evaluate your monetary motive, we would say that if you want a lifelong financial shielding, you may consider whole life insurance or other permanent options.  If your budget is too low, term insurance can deliver high coverage at a lower premium.

In addition to this, you are suggested to evaluate your risk tolerance too. If you are not able to decide, a licensed advisor can assist analyses your current situation and recommend the most suitable policy based on your needs.

You can select Term Insurance: If you require high coverage at a low cost for a fixed period.

You can select Life Insurance: If you want lifelong coverage and an additional savings or investment component. 

 

Life Insurance Vs Term Insurance - FAQs

Is term insurance cheaper than life insurance?

As life insurance combine insurance coverage with a savings or investment component are costlier than term insurance which provides coverage for a specific period.

Can I convert term insurance into a life insurance plan?

Yes, an abundance of term insurance plans put forward a conversion option that consents to you for mutation your policy into a permanent life insurance policy, such as whole life or universal life insurance. 

Does life insurance have better returns than other investment options?

Well, it all depends on your economic mathematics and purposes, risk tolerance, and time horizon. But it drives high returns in comparison with the FDs.

What is the right age to buy term insurance or life insurance?

To buy life or term insurance you must have completed a minimum of 18 years and maximum 65 years of your age. In actuality, the right time to buy a policy is when you are financially independent, and you have future goals to stabilize your economic condition.

Can I have both term insurance and life insurance?

Yes, you can. It is even possible to have a series of terms umbrella policy.