Difference Between Term Insurance and Life Insurance

 Confused between term insurance and life insurance? Well, you are not alone. Understanding the difference between term and life insurance helps ensure that you have the right coverage for yourself and your loved ones. Term insurance covers pure risk at a low premium, while life insurance covers protection as well as savings or investment. Further, understanding life insurance and term insurance meaning will let you make a well-informed decision, save your money, and ensure your family's financial security. In this blog, let us understand the difference between term insurance and life insurance.

 

What are term insurance and life insurance?

Term insurance and life insurance seem very similar; however, they serve different objectives. You can make wise decisions by knowing their features that will help you comprehend the term vs life insurance difference.
 

Term insurance

Term insurance is a pure protection plan that provides a sum assured to your family in case you die during the policy period. It covers the risk of early death, without any savings or investment feature. In case you survive the entire policy term, you don't get any funds back. The term plan is affordable, offering substantial coverage at a low cost.
 

Life insurance

Life insurance combines protection with savings or investment. You'll find it in various forms like traditional life insurance, endowment policies, and whole life plans. If you survive until the end of the term, you receive a maturity sum that can support your long-term financial goals. Premiums are generally higher than term insurance.

Difference between term insurance and life insurance

The term insurance and life insurance difference lies in their core purpose. Life insurance covers you and your family in case of your death while also building savings. Term insurance provides coverage during a chosen period at an affordable price, allowing you to secure adequate coverage without a financial budget. Term policies can be customised to your specific needs and help protect your family's future.

 

Term insurance vs life insurance: overview table

The following table highlights the difference between term and life insurance.

Features	Term insurance	Life insurance
Coverage	Specific term or period (e.g., 30, 40, or 50 years) or till age 60/65/70/75.	Provides lifelong coverage, depending on the type of plan selected
Maturity Benefits	A basic term insurance policy offers no maturity benefits to policyholders. Financial protection of the family is the main objective.	Most life insurance plans offer maturity benefits to policyholders.
Term Period	Usually, a term insurance plan tends to be available for a tenure of 4 to 65 years.	Typically, the term of a life insurance policy may be between 5-30 years. In whole life insurance plans, the coverage is for the entire duration of your life.
Flexibility	Some insurance companies may also offer add-on covers/riders# that allow policyholders to potentially enhance the coverage and benefits of their policy.	Apart from add-on covers, you may also get loans on your insurance policy and request partial withdrawals with life insurance plans.
Discontinuing the policy	Discontinuing a term insurance policy tends to be straightforward. Once you stop paying the premiums, the policy automatically lapses.	To receive the full maturity benefits, you must complete the entire policy term. Withdrawing earlier may result in deductions by the insurer before the benefits are paid out.
Premiums	Premiums are low.	Premiums are generally high compared to term insurance.
Bonuses & Additional Benefits	Offers no additional benefits and bonuses.	Offers several bonuses and additional benefits, depending on the type of plan.
Risk Coverage and Savings	Provides only risk coverage.	Provides both risk coverage and savings components.
Loan facility	You cannot take loans against term insurance policies.	Many life insurance policies allow you to take a loan against the policy value.
Surrender value/paid-up value	There is no surrender value or paid-up benefit if you stop paying premiums in term insurance.	In case you stop paying premiums after a few years, your policy gets a paid-up value. You will get a surrender amount if you surrender the policy later.

Let’s explore each of these points in more detail to better understand the differences between term insurance and life insurance.

Coverage

Term insurance offers financial protection only in the event of the policyholder’s premature death during the policy term. The nominee receives the death benefit if this occurs.

 

In contrast, life insurance covers both premature death and survival until the end of the policy term, offering broader protection.

Maturity benefits

Term insurance generally does not offer any maturity benefits. If the policyholder survives the term, no payouts are made (unless opted for Return of Premium). Tata AIA Sampoorna Raksha Promise offers 100% return of premium.

 

Life insurance plans, on the other hand, offer maturity benefits if the policyholder survives the policy term. Some plans also include bonuses, guaranteed additions, or loyalty benefits.

Term period

Term insurance typically offers coverage for 10 to 35 years, depending on the policyholder’s age and choice. Life insurance plans generally offer coverage for a shorter duration, usually between 5 and 30 years. Whole life plans may extend up to 100 years.

Flexibility

Life insurance plans are more flexible. They may offer options like policy loans, partial withdrawals, and plan customisations. Term insurance is less flexible. It usually cannot be altered once bought and does not include any savings or investment benefits.

Discontinuing the policy

If premium payments are stopped for a term plan, it lapses without any surrender or paid-up value. There are no payouts. Life insurance policies usually acquire a paid-up value after a certain number of years. If discontinued, a reduced benefit or surrender value may still be available.

Premiums

Premiums for term insurance are low and affordable, as they provide risk cover. The premium for life insurance is higher, as it provides both risk coverage and savings or investment benefits.

Bonuses and additional benefits

Term insurance plans do not offer bonuses like loyalty, terminal, reversionary, or accrued bonuses. However, life insurance plans may include these benefits. Both types of plans can offer life-stage benefits and riders^#, depending on the specific terms and conditions of the policy you choose.

Risk coverage vs savings

Term insurance provides only death benefits to the nominee if the policyholder passes away during the policy term. In contrast, life insurance offers both death benefits and a maturity benefit if the policyholder survives the term. Term insurance can be suitable for those looking only for risk protection, while life insurance suits those who want both protection and savings for the future.

Loan facility

You cannot take loans against term insurance plans, as they do not build cash value. Many life insurance policies allow you to take a loan against the policy's cash surrender value.

Surrender/paid-up value

Term insurance does not provide any surrender value or paid-up benefits, even if you stop paying premiums. Life insurance policies may acquire a paid-up value or surrender value after a certain number of years if premiums are discontinued. 

Life insurance has become an essential tool for protecting the financial well-being of dependent family members. In recent years, there has been an increase in the number of people purchasing life insurance to create financial security for their loved ones.

Different types of term and life insurance plans

Term insurance types	Life insurance types
Level term insurance plan Increasing term insurance plan Decreasing term insurance plan Convertible term insurance plan Term insurance plans with riders#	Whole life insurance plan Endowment assurance plan Money-back plan Child plan Unit-linked insurance plan (ULIP) Pension plan

 

Which one should you choose?

Life insurance and term insurance need to be selected depending upon your life stage, financial objectives, and preferences. The following points can help you find out which is better, term insurance or life insurance, considering your needs.

 

• If you are a young working professional, then you may choose term insurance since it provides affordable, high coverage for the protection of your family in case of unexpected events.
• If you are married and have a family, you may opt for a combination of term insurance and investment-linked life insurance for protection and savings for your family's future.
• If you want returns, then you may seek life insurance, e.g., endowment or money-back policies, which not only provide financial security but also maturity benefits in the long term.

Tax benefits of term and life insurance plans

Understanding the tax benefits of term insurance and life insurance is key to maximise your savings. Here's all you need to know:
 

• Section 80C deductions: Under Section 80C, the premium paid for term and life insurance plans is deductible up to 1.5 lakh annually.
• Section 10(10D) benefits: Both plans offer tax-free death benefits, ensuring your family's financial security.
• Maturity benefits: Only life insurance, such as endowment and whole life insurance, provides tax-free maturity benefits, and term insurance does not.
• Rider^# premiums: Rider^# premiums are eligible for tax benefits under Section 80D, such as critical illness insurance.
• Additional benefits: Depending on the plan’s features and riders^#, additional deductions may be available.

How to choose the right plan between term and life insurance?

Here is the guide to help you choose the right plan between term and life insurance:
 

• Determine your goal: Identify your goals, whether you want a pure protection plan or savings or an investment plus protection plan.
• Evaluate dependents' needs: Consider your family’s future expenses, debts, and any other expenses.
• Assess affordability: Evaluate the premiums. Term plans generally have more affordable premiums than whole life Insurance or endowment plans.
• Check policy term: Check the policy term duration of the plan. A term plan provides insurance for a specific period, whereas life insurance provides coverage for a longer duration or lifetime.
• Check returns: Life insurance policies accumulate a cash value, while a basic term plan has no returns if you outlive the policy.
• Compare riders^#: Riders^# like critical illness or accidental death riders^# are available in both plans.

Conclusion

To make an informed decision for you and your loved ones, you should know the life insurance and term insurance difference. You can opt for term insurance if you need financial security at affordable costs, especially during working years. Or, if you want a plan that provides protection combined with savings or investment, life insurance would be a better choice. The right decision depends on your financial objectives, age, and finances. To achieve both savings and protection, you could even combine both.