Term plan vs. Investment Plan: What to Know

Investment, insurance, and saving for emergencies are the three major components of a sound financial plan. Mixing these three elements is generally not recommended. However, some insurance plans offer pure life protection while others also include an investment component.

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Whether term insurance or investment product, each has its advantages and disadvantages that we will discuss in this article. Moreover, we will also do a side-by-side term plan vs investment plan comparison. An in-depth analysis of each aspect with the pros and cons and comparing them against the other will give you the best idea of making sound financial choices.

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

Term Insurance

A term insurance policy is the most straightforward type of life insurance policy available on the market. It serves as financial security for the insured's family in the event of uncertainty. In the ideal situation, the policy will provide death benefits to beneficiaries if the policyholder passes away during the policy term.


Mentioned below are the notable highlights of a term plan:

The policy will provide death benefits to beneficiaries in the event of the insured's death during the policy tenure.

  • 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.
  • Term insurance may be considered the least expensive life insurance policy on the market. The insured needs to pay fixed premiums throughout a specific tenure.  
  • 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 have an investment component in addition to life coverage. A portion of the premiums paid by the insured is used to fund life insurance, while the rest is invested in funds linked to the market. It also permits policyholders to invest in the funds of their choice.


Mentioned below are the notable highlights of an investment plan:

  • The policy comes with two benefits. The policyholder gets life coverage as well as wealth creation in the same policy.
  • The insured 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.
  • 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.
  • Investment plans do not come with the burden of high fees. According to the Insurance Regulatory and Development Authority of India (IRDAI), the annual cost is between 2-2.25 %.
  • It is advisable to put money into long-term plans of investment to earn decent returns to the market.

Term Insurance Plan

Investment Policy

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(10)D from 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 a maturity reward when you can complete the term of the policy.

It is contingent on the market performance.

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. 

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.

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 investment plan with a term plan and vice versa.

Final Word

Both term and investment plans have their benefits. As stated above, it would be great if you consider adding both to your portfolio. As a policy buyer, you need to assess your financial conditions, family requirements, income schedule, and future predictions to decide which one to go for.

Written By: PolicyBazaar

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