If you have dependents, you've probably considered how to provide for them post your demise already. You've most likely started researching a policy to help your loved ones continue their lifestyle without worrying about money. Life and term insurance policies might seem like excellent options. After all, both offer coverage to your loved ones post your death. But does that mean both are the same? Absolutely not.
We are here to help you choose between the two by helping you understand the difference between term insurance and life insurance. Let's go ahead and explore the difference between term insurance and life insurance.
Term vs Life insurance: What are they?
Life insurance
A life insurance policy is a financial tool that protects your family from monetary challenges if you pass away. When you buy a life insurance policy, you make periodic payments known as premiums to the insurance company. The coverage provided by the life insurance policy lasts your lifetime. This means you don't have to worry about your policy expiring as long as you pay the premiums.
Term insurance
Unlike a life insurance policy that covers you for your lifetime, term insurance covers you for a pre-determined number of years or a "term". If the insurance holder passes away while the policy is active, the beneficiaries receive the payout. Upon completion of the insurance period, there is no payout to the beneficiaries, and the insurance expires.
Term insurance vs Life insurance: Key differences
#1 Duration
The prime difference between term and life insurance is the duration they cover. Term insurance covers a pre-determined and fixed period. This period usually ranges from 10 to 30 years. After this period, the term insurance plan automatically expires.
On the other hand, life insurance plans can cover the policyholder's lifetime as long as timely premium payments are made.
#2 Premium
Another significant difference between term and life insurance is the premium you must pay for coverage. Term insurances cover shorter durations, meaning the chances of a claim are low. Due to this, term insurances have a significantly lower premium than life insurance, which covers a lifetime's duration.
#3 Benefits
In the insurance policy world, "benefit" refers to any payout by the insurance company. Let's talk about two benefits here- maturity benefits and death benefits.
Maturity benefits are insurance companies' payouts when an insurance policy matures. In the case of term insurance, there is no maturity benefit, as once the duration of the insurance is over, the insurance expires. However, when life insurance matures, you receive an amount based on the terms of your policy.
Death benefits apply to both term and life insurance policies. These are the amounts paid to the beneficiaries when the policyholder passes away. Although both term and life insurance policies provide death benefits, term insurance typically offers a higher amount because it only covers death. Life insurance policies include extra benefits, and the premiums paid also go towards providing those benefits, therefore lowering death benefits.
#4 Cash value and surrender value
An insurance's cash value refers to an insurance policy's share that earns interest and can be withdrawn in case of an unexpected event.
Life insurances have a cash value element, meaning you can take out loans against it or even use your policy as collateral. The cash value is what allows you to withdraw partial amounts from the policy when the need arises. Note that the cash value for life insurance policies increases as the policy matures.
Term insurance has no cash value element associated with it, so you cannot use it as an investment tool or withdraw cash against it. This is because if term insurance had cash value, they wouldn't be able to offer adequate coverage and a low premium.
Life insurance policies also allow insurers to terminate the insurance before it matures and offer a sum equivalent to the cash value in exchange. This is the surrender value of a life insurance policy and is unavailable for insurers who opt for term insurance.
#5 Flexibility
Both term insurance and life insurance offer flexibility to insurers in different ways. For instance, given life insurance policies have a cash value attached to them, investing in them ensures your family will be taken care of post your demise and allows you to redeem the insurance during financial emergencies. That said, surrendering the life insurance policy is incredibly difficult.
This is where term insurance policies shine. Unlike life insurance policies requiring you to complete the term to reap all the maturity benefits, term insurance policies make no such claims. Surrendering the policy is as easy as stopping to pay the premiums.
#6 Tax benefits
Those who opt for life insurance policies can claim tax benefits under Sections 80C, 80D and 10(10D) of the Income Tax Act. In comparison, insurers who have subscribed for term insurance policies can claim benefits under Sections 80C and 10(10D). Here's a better look at the norms specified under these sections.
As per section 80C of the ITA, insurers can claim deductions of up to Rs. 1,50,000 annually against the premium paid towards the policy, provided the premium amount is less than 10% of the insured sum.
Whereas under 10(10D) of the ITA, beneficiaries of the term insurance policy can claim tax exemptions on the death proceeds received, provided the annual premiums paid for the policy are under Rs. 5 lakhs. For ULIP policies, the cap for the premiums paid is Rs. 2.5 lakhs.
Additionally, policies with a critical illness cover can claim additional deductions on the premium paid towards insurance under section 80D.
Conclusion
Now that we have covered term vs life insurance, you can choose a suitable one for yourself. When doing so, remember to make your choice depending on factors like your goals and financial position. Looking for a reliable finance partner to partner with for your insurance policy? Partner with Tata Capital.
Through our Moneyfy portal, you can apply quickly for an insurance policy. Visit our website to learn more about our offerings. You can also download the Moneyfy app for Android or iOS and apply for insurance through your mobile device.
20 June 2023
6 mins read
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