Difference between Term Insurance and Life Insurance

Know the key difference in detail—term insurance offers pure protection, while life insurance provides both coverage and long-term savings benefits.
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3 min
02-September-2024

When it comes to securing the financial future of your loved ones, life insurance and term insurance are two common options that offer different benefits and features. While both aim to provide a safety net, they have distinct characteristics that cater to various needs and preferences.

In this comprehensive guide, we will delve into the differences between term insurance vs. life insurance, helping you make an informed decision about which option aligns best with your goals and circumstances.

What are term insurance and life insurance, and how do they work?

Here is a short overview of how term insurance and life insurance work:

What is life insurance and how does it work?

Life insurance is a form of protection that pays out a sum of money to the designated beneficiaries if the policyholder passes away during the policy's term. Life insurance policies come in two types, term insurance and whole life insurance. Whole life insurance policies provide coverage throughout the policyholder's lifetime and offer a cash value component that grows over time. On the other hand, term insurance policies provide coverage for a specific period, ranging from 5 to 30 years, and do not include a cash value. The difference between term and life insurance lies in their duration, cost, and additional benefits, making it essential to choose based on individual financial goals and needs.

What is term insurance and how does it work?

Term insurance is a specific type of life insurance that offers coverage for a predetermined period, known as the ‘term’. Unlike other types of life insurance, term insurance is protection oriented. It does not build cash value over time, but it provides a death benefit to beneficiaries if the insured passes away during the term of the policy. The difference between term insurance vs. life insurance lies in their purpose—while term insurance focuses solely on protection, whole life insurance includes an investment component, building a cash value that can be borrowed against or withdrawn. Term insurance is especially popular for its affordability, simplicity, and ability to offer substantial coverage at lower premiums, making it an ideal choice for individuals looking for cost-effective financial security.

What is life insurance?

Life insurance is a form of protection that pays out a sum of money to the designated beneficiaries if the policyholder passes away during the policy's term. Life insurance policies come in two types, term insurance, and whole life insurance. Whole life insurance policies provide coverage throughout the policyholder's lifetime. It offers cash value, while term insurance policies provide coverage for a specific period, ranging from 5 to 30 years.

Difference between life insurance vs. term insurance

To better understand the differences between term insurance vs. life insurance, here is an overview of the features of each policy type.

Parameters

Life insurance

Term insurance

Coverage duration

Lifelong

Specific term (for example - 10, 20, 30 years)

Cash value component

Provides cash value that accumulates over time

No cash value is provided

Premium rates

Higher premium rates due to lifetime coverage and guaranteed benefits

Lower premium rates due to a limited policy term and no cash value

Death coverage

A guaranteed death benefit is provided

A death benefit is paid if the policyholder dies within the policy term

Flexibility

Less flexible due to lifelong coverage

More flexible due to the option to renew the policy after the term expires

Investment component

Comes with an investment component with the potential for returns

No investment component is involved

 

Here is a detailed explanation of the key points mentioned in the above table:    

• Coverage duration

Life insurance provides coverage for the entire lifetime of the insured as long as premiums are paid. It ensures that beneficiaries receive a payout whenever the insured passes away.
Term insurance offers coverage for a specific period, such as 10, 20, or 30 years. If the insured dies within the chosen term, the beneficiaries receive the death benefit.

• Cash value component

Whole life and universal life insurance policies come with a cash value component that grows over time. This component can be accessed through loans or withdrawals and can serve as an investment vehicle.
Term insurance policies do not have a cash value component. They focus solely on providing a death benefit if the insured dies during the term.

• Premium

Premiums for life insurance policies are generally higher due to the lifelong coverage and cash value component. These policies require consistent premium payments throughout the insured's life.

Term insurance policies typically have lower premiums, making them more affordable. However, premiums may increase when the policy is renewed for a new term.

• Death coverage

Life insurance guarantees a death benefit payout whenever the insured passes away, regardless of the age at death.
Term insurance provides a death benefit only if the insured dies during the specified term. If the term expires and the insured is still alive, there is no payout.

• Investment element

Whole life and universal life insurance policies have an investment element, allowing the policy to accumulate cash value over time. This cash value can be utilised for various financial needs.
Term insurance focuses solely on providing financial protection in the form of a death benefit. It does not include an investment or savings component.

• Flexibility

Life insurance policies often offer more flexibility, allowing policyholders to adjust coverage amounts or use the cash value for loans or withdrawals.
Term insurance provides fixed coverage for a set term. Once the term ends, the policyholder must renew the policy or seek new coverage.

How to choose between term and life insurance: A step-by-step guide

Here is a quick guide to help you choose between term insurance and life insurance:

  • Understand your goals – Consider whether you want pure financial protection (term insurance vs life insurance) or savings plus protection.
  • Assess affordability – Evaluate the premiums; term plans are typically more affordable than whole life or endowment plans.
  • Review the duration – Term insurance offers coverage for a specific period, while life insurance covers you for life or a longer term.
  • Check returns – Whole life or endowment plans build a cash value, while term insurance offers no returns if you survive.
  • Compare riders – Add-ons like critical illness or accidental death riders are available in both types.
  • Evaluate family needs – Ensure the policy covers your family’s future expenses, debts, and education costs.

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life insurance

Life insurance vs. non-life insurance: Understanding the basic differences

Life insurance and non-life insurance are two different types of insurance policies. Life insurance provides financial protection and coverage against the risks associated with death. Non-life insurance, also known as general insurance, covers everything else. Non-life insurance includes coverage for property, vehicles, medical expenses, accidents, and liability.

Life insurance policies are designed to provide coverage in case of death or other life events such as disability or critical illness. Non-life insurance policies are primarily designed to protect against accidental damage or loss.

Benefits of term insurance

Given below are the benefits of term insurance:

  • Financial security: Term insurance provides a lump-sum payout to your loved ones in case of your untimely demise, ensuring their financial stability.
  • Affordable premium: It's one of the most cost-effective insurance options, allowing you to secure a high coverage amount at a relatively low premium.
  • Flexibility: You can choose the policy duration (term) that suits your needs, ensuring coverage during critical life stages.
  • Debt protection: Term insurance helps pay off outstanding loans and mortgages, preventing your family from inheriting your debts.
  • Tax benefits: Premiums paid towards term insurance are eligible for tax deductions under Section 80C of the Income Tax Act.

The choice between these two options depends on your specific financial goals, current circumstances, and preferences. If you seek lifelong coverage, cash value growth, and investment potential, a life insurance policy such as whole life or universal life may be suitable. On the other hand, if affordability, simplicity, and temporary coverage are your priorities, term insurance can offer the necessary financial protection during critical years.

What are the tax benefits of term and life insurance plans?

Understanding the tax benefits of term insurance vs life insurance is essential for maximising your savings. Here’s what you should know:

  • Section 80C deductions – Premiums paid for both term and life insurance plans qualify for deductions up to Rs. 1.5 lakh annually.
  • Section 10(10D) benefits – Death covers from both plans are tax-free, ensuring financial security for your family.
  • Maturity benefits – Only life insurance (like endowment or whole life) offers tax-free maturity benefits under Section 10(10D); term insurance has no maturity value.
  • Rider premiums – Premiums paid for riders, such as critical illness, are also eligible for tax benefits under Section 80D.
  • Additional benefits – Some plans may qualify for other deductions depending on specific features and riders.

In conclusion, understanding the nuances of these insurance types lets you to make an educated decision that aligns with your unique situation. It is advisable to consult with a financial advisor who can provide personalised guidance based on your goals and needs. Whether you opt for the security of lifelong coverage or the simplicity of term-based protection, the choice you make will play a significant role in securing your loved ones' financial future.

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Frequently asked questions

What is the difference between life insurance and term insurance?

Life insurance is a comprehensive type of coverage that provides financial protection for the whole life of the policyholder. On the other hand, term insurance is a type of life insurance that provides protection for a specific term or period, often ranging from 5 to 30 years. It doesn't offer savings or investment accounts.

What is the advantage of term life insurance?

The biggest advantage of term life insurance is that it is usually much more affordable than traditional life insurance policies. It provides coverage for the specific term, so the premiums are generally lower. This type of insurance is best for individuals who want protection for a specific period, such as when paying off a mortgage or when children are young.

Which is better, term insurance, or life insurance?

It depends on your specific needs. If you want long-term financial protection and want an investment account that can grow over time, then life insurance may be the better option. However, if you want affordable coverage for a specific period and aren't interested in investment accounts, then term insurance may be the better choice. It's important to consult with an insurance professional to help you decide which policy is best for you.

What is the biggest advantage of life insurance?

The biggest advantage of life insurance is that it provides long-term financial protection and an investment account that can grow over time. This type of insurance is best for individuals who want a comprehensive policy that will provide financial protection for their entire life. Additionally, certain types of life insurance policies can offer tax benefits and protection against estate taxes.

Does term insurance cover death occurred outside India?

Yes, most term insurance policies cover death that occurs outside India, provided all policy conditions are met. It's important to inform your insurer about your travel plans and ensure your policy is active. Some policies may have exclusions or require additional coverage, so it is advisable to review your policy details.

Which is better: term insurance or life insurance?

Term insurance provides pure life cover for a specific period at an affordable premium, while life insurance, like whole life or ULIPs, combines coverage with savings or investment benefits. The choice depends on your needs—term insurance is cost-effective for coverage, while life insurance offers additional financial growth options.

What are the drawbacks of term life insurance?

The main disadvantage of term life insurance is that it offers no payout if the policyholder survives the term. Additionally, premiums increase with age, and there are no savings or investment components, unlike other life insurance plans that may provide maturity benefits.

Why is term life insurance popular?

People prefer term life insurance because it provides high coverage at affordable premiums. It is an excellent option for securing the financial future of dependents in case of the policyholder’s death, offering peace of mind without the high costs associated with traditional life insurance products.

Can I get tax benefits with term and life insurance policies?

Yes, both term and life insurance policies qualify for tax benefits under Section 80C for premiums paid, and death covers are tax-free under Section 10(10D), offering valuable financial savings.

How do maturity benefits compare between term and life insurance plans?

Term insurance doesn’t offer any maturity benefits, while life insurance policies like endowment or whole life provide a lump sum payout on maturity, acting as a savings component.

What optional riders can I add to term and life insurance plans?

Riders such as critical illness, accidental death, and waiver of premium are commonly available with both term and life insurance, enhancing coverage by offering extra protection at a nominal cost.

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