Life insurance is an integral part of financial planning. A life insurance plan helps to secure the financial future of your loved ones. There are different types of life insurance, and term insurance is one of them, which is simple and affordable.
Get this clarity first. There is nothing like term vs. life insurance. Term insurance is a type of life insurance. Let’s explore the umbrella concept of life insurance and its subset, term insurance, in detail!
What is Life Insurance?
Life insurance: It is a contract between an insurer and the policyholder that ensures that a monetary payout is made to the policyholder’s family when they pass away during the policy period. The payout can help the family overcome any financial difficulties that may arise after the death of the policyholder (such as loan repayment, maintaining their current lifestyle, etc.).
There are many types of life insurance policies, such as endowment plans, term plans, and unit linked insurance plans (ULIPs). Some life insurance policies also offer you the chance to grow your wealth, thanks to the investment component in them.
What is Term Insurance?
Term insurance: Term insurance is a simple and affordable form of life insurance that covers a policyholder only up to a certain period of time. If the policyholder passes away during the policy period, their family gets the life cover payout. Just like any other life insurance policy, this life cover payout can be used by the policyholder’s family to overcome any financial difficulties that may arise post their death. There is no investment component in term insurance and no maturity returns as well. That means if you outlive your term plan’s policy period, you get nothing.
Term Insurance vs. Life Insurance: Understanding Your Options
Many get confused between term vs. life insurance, and sometimes even use both terms interchangeably. But both are different in the sense that life insurance is an umbrella term for policies that offer financial protection to your family and term insurance is just a subset of life insurance. It’s crucial for you to understand the different types of life and term insurance before you make the right choice for yourself.
Term insurance is a type of life insurance that protects the policyholder for a certain number of years only. While other life insurance policies (such as ULIPs or endowment plans) have investment components, term insurance does not have any. It just offers a life cover. That means there are no maturity returns in term insurance. What works for term insurance is that it offers a relatively large life cover at generally affordable prices.
So, when it comes to choosing between term insurance and life insurance, the choice depends on your goals. If you are looking to get affordable life insurance coverage, opt for a term plan. If you are someone who is looking not only for financial protection for your family but also an investment option, other types of life insurance policies may suit you better.
Types of Life Insurance Plans
Here is a brief explanation of the various types of life insurance plans:
1. Term insurance: It is a pure protection policy that offers only a life cover and covers you for a certain period of time.
2. Whole life insurance: This plan covers you for your entire life. These plans cover you till you turn 99 years old and can be used for estate planning, that is, for passing down your wealth.
3. Endowment plan: In this plan, you receive a maturity benefit if you outlive the plan.
4. Money back plan: Just like an endowment plan, this plan too offers a maturity benefit. You receive the benefit in installments after the end of the policy term.
5. Child plan: This plan aims to secure the financial future of your child in your absence.
6. Pension plan: This plan can help you in creating a regular income stream post your retirement.
7. Unit linked insurance plan (ULIP): This plan offers the dual benefits of life cover and investment.
Types of Term Insurance Plans
There are different types of term insurance plans. Here is a brief explanation about them:
1. Level term insurance plan: Also known as pure protection plans, these plans just offer life cover. Your family gets the life cover as a term insurance payout if you pass away during the policy period. The life cover offered is fixed. That means if the life cover was Rs. 1 crore, your family will receive that amount as a claim payout, not more, not less. Further, the premiums are fixed, so it has a predictable cost structure.
2. Increasing term insurance: These are protection plans where the life cover changes automatically or upon request. In these types of term plans, the life cover increases, either automatically (in the case of term insurance with increasing cover) or on request (in the case of term plans with life stage benefits). These term plans may suit those who feel their financial liabilities may increase in the future. Premiums may be higher than for level term insurance.
3. Decreasing term insurance: These too are term plans with changing life covers. In these plans, the life cover decreases over a period of time. These term plans may be suitable for those who feel their liabilities will decrease in the future.
4. Term return of premium (TROP) plans: In these term plans, the policyholder gets their premiums back if they outlive the policy. Further, TROP plans are generally more expensive than level term insurance plans. As aforementioned, these plans have some monetary value at the end of their life period.
5. Convertible term plans: These too are term plans that have some monetary value at the end of their policy period. In these plans, the policyholder has the option to convert the term plan into any other type of life insurance (such as whole life insurance) at the end of the policy period.
6. Term plans covering more than one person: As the name goes, these plans cover more than one person. For example, a joint term plan covers you and your spouse.
Deciding Between Term Insurance and Life Insurance
While the options for life insurance are many, it all comes down to you and what you prioritise. If you are looking to secure the financial future of your family in an affordable way, term insurance may be the right fit for you. If you are looking to secure the financial future of your family and also get some monetary returns, other types of life insurance (such as ULIP) may be the right fit for you.
Frequently Asked Questions
Q1. What is the difference between life insurance and term insurance?
Term insurance is an affordable form of life insurance that covers only up to a certain amount of time. It offers only a life cover and does not offer any investment components. Other life insurance policies (such as ULIPs or endowment plans) offer both life cover and investment components.
Q2. Which is better? Term insurance, or life insurance, and how do I decide?
Which is better, term insurance or life insurance? It depends on your needs. If you are looking to secure the financial future of your family affordably, then term insurance may suit you. If you are looking for both life cover and returns from your insurance policy, then other life insurance plans (such as endowment plans or ULIPs) may be the right fit for you.
Q3. Can I have both term insurance and life insurance policies at the same time?
Yes, you can have both term insurance and life insurance. However, remember to declare all your existing life insurance policies to your insurer when you’re buying a new life insurance plan.
Q4. What is the best age to buy term insurance or life insurance for maximum benefits?
You should try buying term or life insurance when you are young, as you can lock in cheaper premiums. Trying to get a term plan or another life insurance plan in your 20s can be a great idea to protect your family’s financial future.
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