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Term Insurance vs Traditional Life Insurance: Benefits Compared

In today’s day and age, it is very important to have insurance coverage in order to deal with the uncertainties of life. With the burgeoning need of insurance policies, there are a plethora of insurance products available in the market. However, choosing the right insurance plan according to one’s own suitability depends on various factors.

It is important to consider factors like time period, age, number of dependents, and the amount of coverage required before zeroing on an insurance policy. So, doing a little bit of research before making a final decision always helps in choosing the right insurance policy. If we talk about term insurance and a traditional life insurance policy, then both the plans have some advantages and some limitations.  Let’s take a look at these in details in order to understand whether you should consider buying term insurance or a traditional life insurance policy.

Death Benefit-

The most common difference between a term insurance and traditional life insurance plan is that a term insurance plan only provides death benefit in case of demise of the insured within the term period, whereas a life insurance policy offers both death and maturity benefit to the insured. The amount provided as the death benefit in term insurance plans is much higher than the maturity benefit offered by life insurance policies. Even though most insurance buyers consider investing in life insurance policies in order to avail the dual benefit of life protection along with returns on the investment, it is advisable to have at least one term insurance plan as it provides a higher death benefit in minimum premium amount.

Risk covered Vs Savings-

 A term insurance plan covers the insured by providing a death benefit to the family of the insured in case of their demise. However, term plans do not offer any survival benefits or maturity returns like life insurance plans. So, one can consider investing in term insurance if he/she only wants to cover death risk and cannot afford to pay high premiums. However, if one wants to create an investment corpus along with a life cover, then they should consider investing in a traditional life insurance policy.

Flexibility-

Surrendering a term insurance policy is much simpler than surrendering a life insurance policy. In term insurance plan, if the insured stops paying the premium, the benefits of the policy terminates and the policy lapses. However, in life insurance policies, the maturity benefit is provided only if the insured completes the entire tenure of the policy. If the insured surrenders or bring a close to the policy mid-term, he/she will not be able to recover the entire saving portion of the policy, as only the premium amount is paid back to the insured, that too, after the certain deductions. Moreover, most of the term insurance plans are renewable and offer an option to convert the policy into an endowment plan for the same sum assured with an increase in the premium.

Premium Amount-

If an individual wants a higher coverage under life insurance policy, then they will have to pay a higher premium amount. Thus, due to a high premium, most of the insurance buyers fail to avail sufficient coverage. Moreover, life insurance policies generally offer low returns, between 5%-7%, which is further reduced in case the policyholder surrenders the policy. Also, the costs related to administration, too, reduce the returns. On the contrary, term insurance plans are much more affordable and provide higher coverage at a minimal cost.

For example: If a 30 years old person wants to buy term insurance of Rs. 10,00,000 assured for a tenure 20 years, then he will have to pay an annual premium of Rs. 3000. On the other hand, a without-profit endowment policy with the same death benefit will have an annual premium of Rs.30,000 and a with-profit endowment policy will cost about Rs.50,000 per annum.

Term insurance plans are beneficial for those individuals who can’t provide financial security to their family or don’t have a stable and secure source of income.

Tax Benefit-

It is often misunderstood that an individual can avail more tax benefit under section 80C of Income Tax Act against the premium paid for a life insurance policy due to higher premiums. Moreover, it is assumed that the maturity benefit is also tax-free.

However, it is important to note that the premium paid towards term insurance plan is not only minimal but is also eligible for tax deductions under section 80C of the Income Tax Act. So, if one wants to invest in an insurance plan with an objective to gain tax benefit, then they can consider investing in a term plan as the difference in premium between both the plans can be invested in other tax-saving schemes like ELSS, PPF, etc.

For your better understanding, here we have shown a comparative study of term insurance plans against different types of life insurance policy.

Parameters

Term Plans

Endowment Plan

Unit Linked Plan

Maturity Benefit

No maturity benefit is offered in term insurance plan

Available

Available

Death Benefit

The sum assured is paid as death benefit in case of demise of the insured.

The sum assured is paid as death benefit, plus bonus (if any), too, is offered

The sum assured is paid as death benefit or fund value, whichever higher.

Premium( for 30-year-old individual and Rs25 lakh coverage for a tenure of 25 years)

Approximate premium: Rs.4000 per annum, premium dependent on policy term, age and sum assured.

Approximate premium: Rs. 21,000 per annum. Premium gets higher depending on the policy term, age and sum assured.

Approximate premium: Rs.2.5 lakh per annum. The insured can decide the premium they want to pay, based on the sum assured determined.

The Bottom Line!

For investors, it is important to understand that life insurance is a crucial part of good financial planning. It is beneficial to own both life insurance and term insurance at the same time. As one plan provides the benefit of investment return and life protection, with another plan you can secure the financial future of your loved ones by paying a minimal premium. The above-mentioned points can help make an informed choice in order to select the best insurance plan according to your suitability.