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Term Plan vs. Investment Plan: What to Know

When it comes to financial planning, selecting the right insurance plan is important. Two common options are term insurance and investment plans. While both serve different purposes, it is important to understand the difference between life insurance and investment plans. While term insurance plans are pure risk cover plans, investment plans can help you secure your family and grow your wealth. Understanding the features and benefits of these plans can help you make an informed decision based on your financial goals and needs. Let’s discuss the difference between term insurance plans and investment plans, and what you should be aware about each plan:

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Term Plan vs. Investment Plan - What is the Difference?

Before we understand the difference between life insurance and investment plans, let us take a look at what term and investment plans are, their types, and their specific benefits:

Term Insurance

A term insurance policy is a type of life insurance policy that provides financial security for the nominee of the policy in case of the policyholder’s death. This is the most affordable plan that provides large life cover at affordable premiums for a long policy term.

Types of Term Insurance Plans

Benefits of Term Insurance

Mentioned below are the benefits of a term plan:

  • Financial protection: All types of term insurance plans provide a death benefit to the policyholder’s family in case of the policyholder’s unfortunate death during the policy term.

  • Return of Premium: To make the product more adaptable, some insurance companies offer maturity benefits, as well. However, you must be covered by the policy's return of premium coverage to avail of this benefit. The return of the premium term plan will ensure that the insurance company pays back the number of premiums the insured paid to the policy in case he/she survives the maturity period.

  • Lowest premiums: Comparing term plus investment plans, the term plans have the lowest premiums of all the life insurance plans. Also, the earlier you buy term plans, the lower the premiums you will have to pay. 

  • Available riders: You can add any of the available riders to the base term plan to enhance the plan’s coverage. This way, you can receive additional coverage at nominal premiums payable along with the base premiums.

  • Tax benefits: The cost of premiums for the plan is eligible for tax deductions by Section 80C under the Income Tax Act. In addition, the death and maturity benefits are tax-free.

Investment Plan

Investment plans provide customers the chance to get life protection and wealth creation benefits within the same plan. With these plans, you can protect the financial future of your loved ones while creating a corpus to fulfill your lifelong goals like buying a house, getting a car, or securing your retirement.

Types of Investment Plans

  • Moneyback plans

  • Unit-linked investment plans

  • Endowment plans

  • Pension plans

  • Child insurance plans

  • Guaranteed return plans

Benefits of Investment Plan

Mentioned below are the notable benefits of an investment plan:

  • Financial Benefits: Similar to term plans, you can get financial protection for your family in case of the policyholder’s unfortunate death during the policy term. Your family can use the amount to take care of their financial obligations and needs.

  • Dual Benefits: The policy comes with two benefits. The policyholder gets life coverage as well as wealth creation in the same policy.

  • Invest as per your Risk Appetite: The life assured can decide whether to invest in equity-oriented funds, debt stocks, or even a mixture of both. The decision is based on a policyholder's risk tolerance.

  • Wealth Creation: With investment plans, you can create wealth by investing in plans with varying market risk funds. It is advisable to put money into long-term plans of investment to earn decent returns to the market.

  • Switch Between Funds: The investment plans permit the possibility of switching funds to achieve greater market returns. If the policyholder believes that his/her investments are not doing well in the market, he/she can change (from equity to debt and reverse) according to the risk tolerance and the performance of the market.

  • Loan Facility: You can request loans in the event of a financial emergency. There is a certain interest that is applied on the loan, which differs from insurer to insurer.

Best term Insurance Plans in India Best term Insurance Plans in India

Difference Between Life Insurance and Investment Plans

Let us see the difference between life insurance and investment plans available in India 2023:

Parameters Term Insurance Plan Investment Plan
Benefits Term insurance plans only offer financial protection in case of the policyholder’s death. Investment plans offer dual benefits of financial protection to the family and wealth creation.
Aim of Cover These plans protect the financial future of the policyholder’s family in case of their untimely death during the policy term These plans provide financial help in case of the policyholder’s death and provide maturity returns to help you fulfil your financial goals.
Plan Type The term insurance product is a simple life insurance component. Investment plans are a combination of insurance and investment components.
Lock-In Tenure Not applicable. 5 years or may vary with the insurer.
Cheap or Not? The premiums are relatively cheaper in comparison to the majority of insurance plans on the market. Owing to various associated charges, premiums can be expensive.
Monetary Cover If you (the policyholder) pass away, your beneficiaries will be paid the assured amount. If anything were to happen to you, then the amount assured (chosen as part of the Insurance) will be distributed to the beneficiary. Additionally, the yields from the investments you made will also be distributed to the beneficiary.
Tax Rebates The paid premiums for term insurance are eligible as tax deductions according to Section 80C in the Income Tax Act, 1961. Additionally, death benefits received by beneficiaries are completely exempt from taxation as per section 10(10D). Like term insurance, the premiums paid under investment plans may be claimed under Section 80C. Furthermore, the payments made are tax-free according to section 10(10D) of the Income Tax Act, 1961.
Plan period It depends on the term you have selected when purchasing the insurance policy. You must wait until the lock-in period of five years to make partial withdrawals.
Returns (if applicable) Death benefits are available if you (policyholder) die unintentionally.

If you are covered by the return of premium coverage, your insurance company will pay back the premiums as maturity benefits when you complete the term of the policy.

On death during the policy term sum assured is paid to the nominee, and if the policyholder outlives the policy term, the maturity benefit as per the policy’s T&Cs is payable.
Loan Availability You cannot avail of a loan under this plan You can avail of loans as per the policy’s T&C after the policy has accrued cash value.

Term Plan vs. Investment Plan - Which is Right for You?

The term insurance plan is the best-assured way to protect you and your family members should something happen to you. They are particularly advantageous if you are looking to secure life coverage at a low cost and with the highest amount of money guaranteed in case of death during the policy term. 

However, investments plans provide the potential for investment along with life insurance. In contrast to the term-only insurance plan, with an investment, you will get a maturity benefit and achieve long-term goals due to the investment returns.

After understanding the difference between life insurance and investment plans, it is clear that both policies have different objectives. None is a clear winner. Incorporating both policies into your portfolio will not only allow you to protect the financial future of your family members but will also help you build a fund to cover your retirement and other needs in the future. That is why it is smart to supplement your term plus investment plan and vice versa.

Wrapping it Up!

Both term insurance with investment plans are a good option for anyone looking to secure their family in their absence. Between term plans vs investment plans, term insurance plans are pure risk protection plans that provide life cover at the most affordable premiums, whereas investment plans provide protection and wealth creation benefits at slightly larger premium rates. You can go through the term insurance and investment difference, benefits, and features of these plans and select the most suitable plan for your lifestyle.


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