Difference Between Term Insurance and Life Insurance

 Are you confused between term insurance and life insurance? Well, you are not alone. By understanding the term and life insurance differences, you can make sure that you have the right coverage for you and your loved ones. A term insurance provides pure risk protection at a low premium, whereas life insurance provides protection as well as savings or investment. By understanding life insurance and term insurance meaning, you can make a well-informed decision, save your money, and ensure your family's financial security. In this blog, let us explore term insurance and life insurance differences.

What are term insurance and life insurance?

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

Term insurance

Term insurance is a pure protection policy that provides financial security to your loved ones in case the policyholder dies within the policy tenure. It has features like:

• Pure protection plan: Term insurance covers only the risk of premature death and does not have any savings or investment feature.
  
• Pays death benefit only: If the policyholder dies during the policy term, the nominee is paid the sum assured so that the family has financial assistance.
  
• No maturity benefit: If the policyholder survives the term, no money is paid back, as the policy is purely for risk coverage.
  
• Affordable option: Since it doesn't have a savings or investment component, term insurance provides substantial coverage at low cost.

For example, a 30-year-old buying a Tata AIA term plan can get ₹1 crore cover for just ₹500 per month.
 

Life insurance

Life insurance combines protection along with the savings or investment component. It is available in different forms such as traditional life insurance, endowment policies, and whole life plans, providing coverage as well as wealth accumulation. Its features include:

• Combines insurance + savings: Life insurance provides financial protection while also allowing the policyholder to accumulate a corpus over time.
  
• Maturity benefit: If the policyholder survives till the end of the term, the plan pays out a maturity sum, which can be used for long-term financial goals.
  
• Higher premiums: Since life insurance combines protection and saving or investment, it generally costs more than term insurance.
  
• May offer returns or bonuses: Some life insurance policies give extra returns or bonus depending upon the performance of the plan, which adds to the total benefits.
   

Key Differences Between Term Insurance and Life Insurance

Let’s now find out what is term insurance vs life insurance in detail:

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 with 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

Term insurance premiums are low and affordable since they offer pure risk cover. Life insurance premiums are higher as they provide both risk coverage and savings or investment benefits over time.
 

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.

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

Which one should you choose?

Life insurance and term insurance needs 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, as it provides affordable, high coverage to protect your family in case of unexpected events.
  
• If you are married and have a family, then you may opt for a combination of term insurance and investment-linked life insurance to have protection and savings for your family's future.
  
• If you need returns, then you can opt for life insurance, e.g., endowment or money-back policies, which provide both financial security and maturity benefits in the long run.
   

Tax benefits of term and life insurance plans

Understanding the tax advantages of term insurance and life insurance is critical to enhancing your savings. Here's what you need to know:

• Section 80C deductions: Insurance premiums paid for term and life plans are deductible up to 1.5 lakh per year.
  
• Section 10(10D) benefits: Both plans offer tax-free death benefits, ensuring your family's financial security.
  
• Maturity benefits: Only life insurance (like endowment or whole life) can provide tax-free maturity benefits; term insurance does not.
  
• Rider^# premiums: Rider^# premiums are also 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 affordable premiums than whole life Insurance or endowment plans.
  
• Check policy term: Check the policy term duration of the plan. Term plan provides insurance for a specific period, whereas life insurance provides coverage for longer duration or life time.
• 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 difference between term insurance and life insurance. You can opt for term insurance if you need financial security at affordable costs, especially during working years. Or, in case 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.