Insurance is one of the best ways to protect your family from your life uncertainties. It provides them the financial support to continue achieving their life goals even when you’re not around. However, not all insurance products are equal. You have life insurance and then you have term insurance; ironically, these two are the most popular insurance products in India.
If you’re interested in securing your family’s future, you need to understand the difference between term insurance and life insurance. Continue reading to find out all about these two investment options.
What is Term Insurance?
Term insurance is a type of life insurance where the insurance company agrees to pay out a predefined sum of money in the case of your death during the policy’s tenure. This sum, known as the death benefit, is paid out to the nominee of the policy. In exchange for this death benefit payout, you’re required to make nominal regular payments, known as premiums, to the insurance provider.
Now, if you happen to survive till the end of the policy’s tenure, term insurance plans don’t offer any kind of payout. The lack of maturity benefits is one of the many reasons why term insurance is often referred to as a pure insurance product and features very low premiums compared to other types of life insurance.
Term Insurance: An Example
Assume you purchase a term insurance policy with a death benefit sum assured of ₹1 crore. The tenure of the plan is 30 years and the amount of premium you need to pay each month comes to around ₹1,200. You name your spouse as the beneficiary of the term insurance plan.
Now, in the case of your demise within the tenure of the plan, the insurance company will pay the death benefit sum assured amount of ₹1 crore to your spouse who has been listed as the nominee of the policy. Your spouse can use the lump sum death benefit to further their life goals and meet their financial obligations.
On the other hand, if you survive till the end of the policy tenure, you will not receive any maturity benefits whatsoever; not even the premiums you paid towards the term plan, unless you’ve opted for the Return of Premium (ROP) rider when purchasing the policy.
What is Life Insurance?
Traditional life insurance products offer the same benefits as a term insurance policy, meaning they pay the death benefit to the nominee of the policy in the case of your death. And in exchange for this life cover, you’re required to make premium payments regularly.
However, in addition to the death benefit, traditional life insurance policies also provide maturity benefits. This means that if you survive till the end of the policy’s tenure, you either get a lump sum amount or a fixed sum of money at regular intervals. Since life insurance combines the element of insurance with savings and investment, the premiums for such plans are almost always higher than term insurance.
Life Insurance: An Example
Assume you purchase a life insurance endowment plan with a tenure of 25 years. The death benefit sum assured under the plan is ₹20 lakhs and the maturity sum assured amount is ₹25 lakhs. The amount of monthly premium you need to pay to enjoy the benefits of the plan is ₹3,000. As with the term insurance example, you name your spouse as the nominee for the life insurance policy.
In the case of your demise within the policy tenure, the insurance company will pay the death benefit sum assured of ₹20 lakhs to your spouse, which they can use as they see fit. On the other hand, if you survive till the end of the policy tenure, the insurer will pay a lump sum maturity benefit of ₹25 lakhs.
Term Insurance Vs. Life Insurance: Differences
Now that you’re aware of what these two insurance products are, let’s compare term insurance and life insurance to see how they differ from one another.
| Particulars | Term Insurance | Life Insurance |
| Scope | Term insurance only offers death benefits | Life insurance offers both death and maturity benefits |
| Premium | Term insurance premiums are the lowest among all life insurance products | Life insurance premiums are much higher than those of term insurance |
| Flexibility | Term insurance plans are only slightly flexible and customisable | Life insurance plans are very flexible and customisable |
| Ability to Avail Loans | You cannot avail a loan against a term insurance plan | You can avail a loan against a life insurance plan |
| Surrender Value | Since term insurance plans don’t have any surrender value, you will not receive any amount if you stop your plan before the end of its tenure | If you surrender a life insurance plan before the end of its tenure, you will receive a certain amount of money as surrender value |
| Convertibility | Some types of term insurance plans can be converted into a life insurance plan at a later point in time | A life insurance plan can neither be converted into term insurance nor any other type of life insurance policy |
| Potential for Higher Returns | Since there are no maturity benefits, there is no potential for any returns when you invest in a term insurance policy | Life insurance plans that invest in market-linked instruments have the potential to deliver high returns in the long run |
| Taxability of Benefits | The death benefit of a term insurance plan is not taxable in the hands of the recipient as per Section 10(10D) of the Income Tax Act, 1961 | Both the death benefit and the maturity benefit of a life insurance plan are not taxable according to Section 10(10D) of the Income Tax Act, 1961 |
Conclusion
Despite their differences, both term insurance and life insurance are great investment options you can consider if you wish to financially secure your family against untoward incidents. If you have other investments and are only keen on insuring your family, you may consider investing in a term plan. The premiums are very affordable, which allows you to opt for a high sum assured amount. On the other hand, if you wish to insure your family and meet your long-term wealth creation goals, you can consider investing in a life insurance policy.
FAQs
What is the primary difference between term insurance and life insurance?
The primary difference between the two types of insurance policies is that term insurance doesn’t offer any maturity benefits, whereas life insurance comes with maturity benefits.
Are riders available in both term and life insurance policies?
Yes. Most insurance providers offer riders for both term insurance and life insurance policies. However, it is important to note that opting for riders will increase your premium payments.
Can I convert a term insurance plan into a life insurance plan?
Yes. Convertible term insurance plans can be converted to a traditional life insurance plan such as an endowment policy or a whole-life policy at a later point in time. However, you should note that only a few insurance providers offer this facility and such conversion is likely to increase your premium significantly.
Are there different types of term insurance plans?
Yes. There are as many as five different types of term insurance plans that you can opt for. The list includes level term insurance, decreasing term insurance, increasing term insurance, convertible term insurance and term insurance with a return of premium option.
Term insurance Vs. Life Insurance - which is better?
Both term insurance and life insurance are good investment options designed to financially protect your family in the case of your death. The choice between these two insurance products must be made after a thorough and careful evaluation of your needs and requirements.