Are life and term insurance the same thing?

Term insurance is an affordable form of life insurance. It works this way:

• You pay a fixed amount of money called premium for a fixed period of time called premium payment term

• The plan covers you for a fixed period of time called policy period
   

If you pass away during the policy period, your family gets the life cover of the plan as a payout and it can be used by them to overcome any financial difficulties that may arise after your demise (such as loan repayment or maintaining their current lifestyle).

Life insurance can be thought of as a blanket term used for financial products which have a purpose of securing an individual’s loved ones’ financial future. They provide a life cover payout if the policyholder passes away during their coverage period. 

Some life insurance policies also provide investment returns (such as ULIPs) while some policies only provide a life cover (such as term plans). 

Even though people use 'life insurance and 'term insurance' interchangeably, most of them do not understand that they have their differences.

To get the best financial cover for your family, you need to know the difference between the two. Let’s see how they are different:

Term insurance:

• It is as a pure protection plan

• It only provides a payout when the life assured (aka you in this case) passes away during the policy duration

• It has no maturity benefits i.e. if you outlive the policy duration, you don’t get any investment returns. (Another reason, to stop calling term insurance an ‘investment’, because it’s clearly not)

Non-term insurance:

• It provides both life cover and investment returns

• If you don’t die, you will get the maturity amount. And if you die, your family will get the life cover and the maturity amount 

• The life cover amount is typically lesser than that in term insurance 

Let’s understand with an example:

Say you have a term insurance policy and a non-term insurance policy. You pay a premium amount of INR 10,000/-* per annum for each of them. The term policy will give you a life cover of INR 1 cr* while the non-term policy will fetch you a life cover of INR 1 lakh* but most of your premium will be invested and will be paid with returns as maturity benefit. 

(*The premium and life cover amounts are indicative and depend on age, lifestyle, health status and other factors)

You can assess your needs and can understand which insurance plan is best suited to them. 

The aim of term life insurance is to provide financial protection to your loved ones for a fixed period of time, in an affordable way. It does not give any returns and if you outlive the policy, you won’t get anything for a pure term plan.

While a whole life insurance policy covers an individual for their lifetime. Further, whole life insurance policies have a savings component, i.e., you get returns. However, typically, the life cover offered by a whole life policy is lesser than a term plan.

What you pick should depend on your needs. If you prefer affordable financial protection of your loved ones, a term plan may fit you. But, if you prefer financial protection and also expect returns, you may want to explore a whole life policy. 

The first factor you need to consider is what you’re expecting from your policy. 

Term vs life insurance, to choose between them you firstly need to understand whether you are looking to affordably secure the financial future of your family or if you’re looking for some investment returns from your life insurance policy. If you aim for the former, term insurance may be suitable for you, however, if you aim for the latter, non-term life insurance policies may be suitable for you.

But, irrespective of the type of policy you choose, here are some other important factors you should consider before buying:

1. Policy period: That is, how long you want to be covered
2. Life cover: That is, what should be your sum assured
3. Add-ons: That is, what riders you want to add to increase your policy’s coverage
4. Premium payments: That is, how you want to pay the premiums for your policy

For this, you need to understand what your needs are and then make a pick on what suits those needs the best. For example, if you are someone who is looking to secure the financial future of your loved ones in an affordable manner, term insurance may suit you the best.

You can also connect with your financial advisor to help you decide on the best type of life insurance for your needs.

Yes, of course! Your father got a term plan to secure your and your family’s financial future. After him, it may be your turn to be responsible for your family’s financial security. 

If you have family members such as your mother, siblings or grandparents who are financially dependent on you, you should buy term insurance so that they can stay financially secure even if you’re no more. 

Your dad has set a good example by being responsible and getting a term plan. You too should learn from him and get a term plan to do your bit for your family’s financial security.