HomeInvestmentTerm insurance vs. life insurance: Understanding the difference.
Term insurance vs. life insurance: Understanding the difference.
June 28, 2023
Insurance is crucial in providing financial security to individuals and their loved ones. Regarding life insurance, two common types often come up in discussions term insurance and life insurance. While they offer protection during the policyholder’s death, they differ significantly in various aspects. This blog will explore the differences between term insurance and life insurance, shedding light on their coverage duration, premiums, cash value, flexibility, and purpose.
Life insurance covers a specific term or period, typically 10 to 30 years. The nominee receives the death benefit if the policyholder passes away within the term. However, if the policyholder outlives the term, the coverage ends, and no payout is made in case return of premium was not selected at the time of taking the policy. In case return of premium is selected at the time of taking the policy, the amount paid as premium is more in comparison to the term plan with no return of premium (ROP) It is affordable for those seeking temporary coverage to address specific financial responsibilities, such as mortgage payments or providing for dependents until they become financially independent. There are many type of life insurance plan available in the market today.
Term insurance offers coverage for a longer duration of the insured individual, few insurance companies now provide coverage up to the age of 100 which is finalised at the time of taking the policy with premium paid till the policy is active or paid for a duration of 5, 10,12, 15 or 20 years. The beneficiaries are entitled to a death benefit whenever the policyholder dies. This type of insurance is suitable for long-term financial planning, estate planning, legacy planning, or as an investment vehicle due to its permanent coverage.
Term insurance: One of the key advantages of term insurance is its affordability. The premiums are generally lower than life insurance since it covers a specific term. Insurance companies calculate term insurance premiums based on the insured individual’s age, health condition, term length, and desired death benefit amount. As term insurance policies do not accumulate cash value, the premiums primarily cover the mortality risk during the term. It is very important to note that the premium in case of term insurance or life insurance are locked and do not increase or decrease with passing of years or in case the insured is diagnosed with any life-threatening disease like cancer. It is recommended to take term insurance early with limited premium payment term (PPT) as it is very pocket friendly for a good amount on insured amount.
Life insurance typically requires higher premiums compared to term insurance. This is because life insurance offers cash back at some point of the policy and the insurance company must pay out the death benefit if the insured person dies in term of the policy period.
Cash Value and Investment Component:
Term insurance: Term insurance solelyprovide death benefit protection for the specified term. Once the term ends or if the policyholder stops paying premiums, the coverage ceases, and there is no accumulated cash value.
Term insurance is straightforward. The coverage and premiums remain fixed throughout the specified term.
Life insurance: Life insurance policies offer greater flexibility, particularly those with a cash value component.
Life insurance serves broader purposes, particularly whole or universal life insurance. It is often utilised for long-term financial planning, estate planning, or as an investment vehicle. The cash value component can be used to build wealth, supplement retirement income, or leave a financial legacy for loved ones. Life insurance offers peace of mind with coverage and the ability to address long-term financial goals.
While term and life insurance provide important financial protection, they differ significantly regarding coverage duration, premiums, cash value, flexibility, and purpose. Term insurance offers affordable coverage, while life insurance provides coverage with potential cash value accumulation. Understanding these differences and evaluating your specific needs and financial goals will help you decide when to select the right insurance policy for yourself and your loved ones.