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Term Insurance and Life Insurance
Table of Content
2. Understanding whole life insurance
3. Term insurance or whole life insurance: Making the right choice
4. Understanding Life Insurance and Term Insurance.
5. What are the Different Types of Life Insurance Plans
6. What are the Different Types of Term Insurance Plans?
7. Term Insurance vs. Life Insurance — What is the Difference?
8. Term Insurance and Life Insurance: Overview
9. Summary
10. FAQs on the Difference Between Term Insurance and Life Insurance
A life insurance plan is an important part of your portfolio diversification. Term Insurance and Whole life Insurance is are types of Life Insurance Policies. Many often confuse one for another as both provide benefits in case of the policyholder's demise. However, both options vary in terms of the policy tenure, cash value, and premium amount, among others.
About term insurance
As the name suggests, term insurance refers to the payment of premium for a fixed period of time. In case of the policyholder's untimely death during this period, the insurance provider is liable to pay the death benefit amount to the beneficiary or the nominee. In case the policyholder survives during the term of the plan, no maturity benefit is provided.
Understanding whole life insurance
Whole life insurance plans offer dual benefits of investment and protection for the entire life of the insured. Whole life insurance plans generally come with an upper age limit of 100 years. Such a plan also offers the advantage of cash accumulation that builds during the entire period of the policy
Term insurance or whole life insurance: Making the right choice
Both term insurance plans and whole life insurance policies have their set of features and benefits. Individuals may make the right choice between the two life insurance options by comparing the benefits and choosing the one that is best-suited to their needs.
Following are three major distinguishing aspects of term insurance and whole life insurance.
1. Premium
Term insurance plans often offer cheaper premiums than entire life plans. It is also vital to understand that with a term plan, the full premium amount is used to provide insurance coverage. The same is not the case with whole life plans. Part of the premium is used for insurance coverage while the rest is invested. In case the policyholder withdraws, surrenders or lives up to the maturity period, the accumulated amount is returned at the sum assured value. Policyholders may also enjoy the benefit of bonus in case profits are earned on the invested amount.
2. Tenure
By its nature, term plans offer coverage for a fixed tenure, such as 5, 10, 15, or 30 years. Whole life insurance plans, however, come with flexible tenures and are usually applicable till the policyholder reaches 100 years of age.
3. Cash value
As opposed to term plans, a part of whole life insurance premiums is invested in financial instruments. A cash value is therefore built up over time. This can be used by the policyholder to borrow money at a cheap rate. Term plans, however, do not offer such a benefit. Additionally, whole life insurance policyholders may withdraw a part of the cash value during the tenure of the policy.
Individuals may, therefore, take into consideration the aforementioned features and benefits while deciding between the two life insurance options. The best way to make the right choice is by keeping two important aspects in mind, the age and the purpose of buying the insurance policy. Individuals may opt for a term plan if they are in the younger age bracket, and may consider converting it into a whole life plan later in life. However, individuals in the older age group, such as 40 years and above may consider availing of a whole life insurance plan. Such an option offers coverage for the entire life and is also cost-effective as term plans levy a higher premium for older individuals.
Individuals may, therefore, opt for the right plan based on their age, financial situation, and the purpose of the insurance plan.
If your family’s financial security is your primary concern, purchasing a life insurance policy should be a vital part of your financial planning. Insurance is a service wherein the onus of providing economic security to the policyholder’s family rests with the insurer if he/she dies prematurely.
You would have come across the terms- life insurance and term insurance whenever you discuss insurance with family and friends. Understanding the difference between term insurance and life insurance is important to make the right decision.
A Life insurance provides cover for the whole life,. Term insurance being a type of life insurance itself provides coverage for a fixed period ranging from 5 to 35 years.
If the policyholder dies during the policy term, the beneficiary will get a lump sum to take care of the family’s financial needs. However, the advantage of life insurance is the cash accumulation for the entire policy period. This long-term savings component can be useful for planning your financial future.
When choosing between any insurance policy, what matters is your financial goals, i.e., whether you need life coverage for your whole life along with a savings component or only life coverage for a fixed period.
Understanding Life Insurance and Term Insurance.
It is imperative to understand term insurance and life insurance in all respects before you invest in any of them.
Life Insurance Plan
A life insurance plan ensures that the financial goals of your family are not endangered even in your absence. In addition, the cash accumulation aspect accommodates your future financial plans. If anything untoward happens to you during the policy term, which can be between 5 years to 30 years or even a whole life, depending on the type of plan you choose, the beneficiaries get a lump sum amount in the form of a death benefit, which can be utilised for various financial needs like repaying a debt, children’s education, medical expenses, for monthly sustenance, etc.
Term Insurance Plan
Being a Type of Life Insurance, Term insurance are distinct from each other in several ways. A term insurance plan, as the name suggests, is a plan with a limited coverage duration. A higher coverage is provided for a smaller premium. The premium is comparatively low if the policy is purchased early in life. Some insurance companies provide coverage for partial or permanent disability that disrupts your income during the policy term. The notable difference in term insurance and life insurance is the premium. Since term insurance has no maturity benefit, i.e., a lump sum provided to the policyholder if he/she survives the policy term, the premium is much lower.
However, the advantage of the term insurance plan is that the insurer pays a minimum sum irrespective of whether a claim was made or the event that was covered under the plan occurred during the policy term. Term insurance plans are the most affordable plans that provide sumptuous coverage.
Term insurance and life insurance both provide premature death coverage, i.e., protect your family financially if you die during the policy term. Life insurance is considered more beneficial because most plans offer a survival benefit, i.e., a lump sum amount if you survive the term of the policy. This can serve as a retirement corpus or can also serve as a financial cushion to help meet your long-term financial goals.
What are the Different Types of Life Insurance Plans
The various life insurance plans are:
Whole Life Insurance Plan
A whole life insurance plan is one that provides coverage for your entire life span.
Endowment Assurance Plan
Under this plan, you receive a maturity benefit, i.e., a lump sum if you outlive the policy term.
Money-Back Plan
This plan also provides maturity benefits. You receive the maturity benefit in instalments after the policy term ends.
Child Plan
This plan helps secure the financial future of your child in your absence.
Unit-Linked Insurance Plan
ULIP has both the insurance and the investment component. It provides life cover while helping your investment grow to secure your financial future.
Pension Plan
This plan is a great way to create a regular income stream. You receive a stipulated amount every month after retirement.
What are the Different Types of Term Insurance Plans?
The following term insurance plans are available:
Level Term Insurance Plan
This is a plan where the premium amount remains the same for the policy duration.
Increasing Term Insurance Plan
The coverage in this plan keeps enhancing as you age.
Decreasing Term Insurance Plan
In this plan, the coverage keeps decreasing with age.
Convertible Term Insurance Plan
Under this plan, you are given the option to change the insurance plan at any stage during the duration.
Term Insurance Plans With Riders
The insurer provides add-on benefits or riders that enhance the coverage of the basic term plan to align with your needs.
Term Insurance vs. Life Insurance — What is the Difference?
Here are some of the life insurance and term insurance pointers:
- Life insurance provides lifetime coverage, i.e., it protects your family throughout your life span. Coverage in term insurance is for a specific period.
- Term insurance is more affordable compared to other life insurance plans and does not financially burden your family in case you die during the policy term.
- You pay higher premiums for life insurance as both maturity and death benefits are offered.
- Term plans can be tailored according to your needs.
Term Insurance and Life Insurance: Overview
Here is an overview of term insurance and life insurance for better clarity about
Parameters |
Term Insurance |
Life Insurance |
Cover Amount |
The coverage amount is provided only on the death of the policyholder during the policy term. |
The coverage amount is provided on the death of the policyholder during the policy term or if the insured survives the policy term. |
Premium Amount |
Affordable premiums |
Much higher compared to term insurance |
Maturity Benefits |
No maturity benefit is provided |
Both death benefits and maturity benefits are provided under most plans |
Risk Coverage Vs Savings |
Provides only risk coverage |
Has both the risk coverage and savings components |
Flexibility |
Inflexible |
Flexible |
Tenure |
Ranges between 5 to 40 years |
Ranges between 5 to 35 years |
Additional Benefits and Bonuses |
No bonuses or additional benefits |
Several bonuses and additional benefits depending on the type of plan. |
Tax Benefit |
Tax benefit available under 80C and 10(10D) of the Income Tax Act 19611 |
Tax benefit available under 80C and 10(10D) of the Income Tax Act 19611 |
Surrender and Paid Up |
No surrender or paid-up value |
If premiums are not paid regularly, the plan attains a paid-up value, which is paid as surrender value when you subsequently surrender the policy. |
An elaborate account of the points covered regarding term insurance and life insurance in the table is given below for a better understanding:
Cover Amount
In a term insurance plan, the beneficiary receives a death benefit if the policyholder dies during the policy term. In a life insurance plan, the policyholder gets cash benefit if he/she survives the policy term. In the case of the untimely death of the policyholder during the policy term, his/her beneficiary(ies) receive the death benefit.
Premium Amount
Premiums have to be paid for both term insurance and life insurance. The premium on a term insurance is comparatively more affordable than that on a life insurance because term plans are for a specific period whereas life insurance plans are for a whole life. Also, if you purchase a term insurance plan early in life the premium is likely to be much lower.
Term insurance plans are perfectly suitable for individuals who cannot afford higher premiums but intend to provide financial security for their families.
Maturity Benefits
The main difference between life insurance plans is the maturity benefit. Term insurance gives the advantage of life cover, whereas life insurance has both the life cover as well as the maturity benefit if you live beyond the policy term.
However, though term plans do not have maturity benefits, they do offer other benefits. Some term plans offer a 100% premium refund option wherein the premiums paid for the tenure are refunded at the end of the policy term. Check for the various term insurance and life insurance plans available at HDFC Life and choose the best.
Risk covered Vs. Savings
Term insurance plans provide only death benefits to the beneficiaries if the policyholder dies during the policy term. Life insurance plans provide both death benefits and maturity benefits. Term insurance is suitable for those who need only risk coverage whereas life insurance is for those who intend to create a corpus for future along with risk coverage.
Flexibility
You are given the option to surrender the policy in both term insurance and life insurance. In a term insurance plan, if the insured stops paying the premium, the policy lapses and the benefits cease. However, in life insurance plans, the insured gets the maturity benefit only if he/she survives the policy term. A provision to surrender the policy during the policy term is given wherein the insured is not given the entire savings portion. Only the premiums paid will be refunded after specific deductions.
Tenure
Term insurance and life insurance plans have a specific tenure. The coverage in term insurance plans is for a specific duration which ranges from 5 years to 30 years. In whole life insurance plans the duration is flexible and you can get coverage up to 100 years.
Additional Benefits and Bonuses
No loyalty, terminal, revisionary, or accrued bonuses are available in term insurance plans. Life insurance plans on the other hand provide all the bonuses. However, life-stage benefits and riders are available in both insurance plans subject to the terms and conditions of the plan you purchase.
Tax Benefit
The premiums paid for both term insurance and life insurance plans are eligible for deductions under Section 80C of the Income Tax Act 19611. The death benefit in term insurance and both death benefits and maturity benefits in life insurance qualify for tax benefits under Section 10(10D) 1.
Surrender and Paid up
In term insurance plans, if the insured stops paying the premium, the policy lapses and the benefits are terminated. In life insurance plans, if the insured discontinues the premium payment after a few years, it attains a paid-up value. Subsequently, if the insured surrenders the policy, a surrender value is paid.
Summary
Term insurance and life insurance plans have their relevance and benefits. They essentially provide financial security to your family in case of any eventuality. The fact that your family will not go through financial hardships in your absence gives comfort and peace of mind. But then, understanding the term insurance and life insurance comparison is crucial to deciding which suits you better.
The key difference is that a term insurance plan provides life cover for a specific period whereas a whole life insurance plan provides coverage for your entire life. Also, unlike term insurance plan that provides only life cover, life insurance has both life cover as well as the savings component which may be beneficial if you need the dual benefit of financial security for your family as well as creating a corpus for your financial future.
FAQs on the Difference Between Term Insurance and Life Insurance
Q. What is the difference between life insurance and term insurance?
The main difference between life and term insurance is; that whole life insurance plans provide coverage for the whole life whereas term insurance provides coverage for a specific period.
Q. Which is better term insurance or life insurance?
The choice of investing in term insurance or life insurance depends on individual needs. If your objective is financial security for your family at lower premiums, then term insurance is ideal for you. If you can afford higher premiums and require both the life cover as well as savings component, life insurance is suitable for you.
Q. What is the best age to buy term insurance or life insurance?
It is recommended to buy term insurance or life insurance plans early in life to get the benefit of affordable premiums. It is best to start a plan between 20 to 25 years of age.
Q. What happens if I stop paying premiums for life insurance and term insurance?
If you stop paying premiums for term insurance the policy lapses and the benefits cease to exist. In life insurance, if you stop paying premiums after a few years the plan attains a paid-up value. If you surrender the policy you get a surrender value.
Q. Can I have both term insurance and life insurance?
Yes. Insurance companies permit the purchase of multiple insurance plans depending on your requirements. You can buy a term insurance as well as a life insurance policy.
Q: Which is life insurance plan is better?
The answer lies in your objective of buying the insurance. Term insurance is one of the types of life insurances. Other types of life insurance plans include ULIPs, money back policies, endowment policies, retirement plans, etc. Whether a life insurance plan or a term insurance would be better for you would depend on factors such as your financial goals, age, existing liabilities and assets, income, and the reason behind buying the insurance.
Q: Which is better, term or whole life insurance?
Term insurance plans are primarily aimed to provide assured life cover to your nominees/beneficiaries in case of your death during policy tenure. In case you unfortunately die after the policy term has lapsed, your nominees may not get the cover amount. But in case of whole life insurance, the policy offers coverage for your entire lifespan, such as up to 99 or 100 years.
Term or whole life insurance, which one is better for you, would depend on how long you want the coverage for. If you want to be specifically covered for particular policy tenure, such as 10 years or 20 years, term insurance can be chosen. But if you wish to get covered for your entire life, whole life insurance can be chosen. You can contact one of India's leading insurers, HDFC Life, to get more clarity about which life insurance would be suitable for you. However, keep in mind that some insurers nowadays offer term insurance till the age of 99 as well.
Q: What are the 3 benefits of term insurance?
The 3 big benefits of term insurance are high sum assured at low and affordable premiums, the option of add-on riders such as critical illness cover, and income tax benefits. Other key benefits of term life insurance include multiple death benefit payouts and the return of premium option.
Q: Is it safe to buy term insurance?
Yes. It is safe to buy term insurance from reputed and leading insurers in India, such as HDFC Life. Do not click on any suspicious or random link or website that claims to provide insurance, as they can be scams. Make sure you check the reputation, history and claim settlement ratio of an insurer when buying term life insurance.
Q: Who is not eligible for term life insurance?
If you meet the eligibility criterion of an insurance company, such as the age, citizenship, medical examination, identity proofs, etc, your term life insurance application will likely be accepted. However, if you fail to meet any criteria, such as your age does not fall into the usual bracket of 18-65 years, or you do not clear your medical tests, you may not be eligible for term insurance.
Related Articles
- Types of Life Insurance
- Term Insurance Eligibility Criteria
- Difference Between Term And Endowment Insurance
- NRI Life Insurance Policies in India | Secure Your Family’s Future
Reference links:
https://news.cleartax.in/why-you-must-buy-a-term-insurance-plan-how-is-it-beneficial/5080/
https://www.investopedia.com/ask/answers/08/term-life-insurance.asp
https://groww.in/blog/difference-between-term-insurance-and-life-insurance
https://www.forbes.com/advisor/in/life-insurance/term-insurance/term-insurance-vs-life-insurance/
ARN- ED/10/24/16455
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
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Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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