Life Insurance vs Term Insurance in India

TeamAckoSept 25, 2024

Life and Term Insurance are popular insurance policies that provide financial protection to policyholders and their families. While both policies offer a death benefit to the beneficiaries, they differ in policy terms, life coverage, and benefits. Understanding the differences between these two policy types is essential before deciding which one to purchase, as each has unique features and benefits. In this article, we will discuss the importance of life insurance and term insurance and explore the key differences between the two policies to help you make an informed decision about choosing a suitable one

Contents

• What is Life Insurance?
• 5 Benefits of Life Insurance
• What is Term Insurance?
• 5 Benefits of Term Life Insurance
• Comparison of Life Insurance and Term Insurance
• Types of Life Insurance plans
• Types of Term Insurance Plans
• How to Choose the Right Type of Insurance Plan?
• About ACKO Life Flexi Term Plan
• How to balance the cost between Life Insurance and Term Insurance? 
• Which is Better Between Life Insurance or Term Insurance?
• Frequently Asked Questions (FAQs)

What is Life Insurance?

Life insurance is a type of insurance policy that provides financial protection to the policyholder's family in the unfortunate event of the policyholder's death. A Life Insurance Plan can also provide maturity benefits. The policyholder regularly pays a premium to the insurance company, and in case of the policyholder's death, the insurer pays a sum assured to the nominee or the policyholder's family. Life insurance plans come in different variants, including Endowment, Money-back, and Whole Life insurance plans. These plans provide financial protection to the policyholder's family and offer savings and investment benefits. 

5 Benefits of Life Insurance

The benefits of whole life insurance are as follows:

Lifelong Coverage: As long as the premiums are paid, life insurance covers your entire lifetime. This can provide peace of mind, knowing you are covered no matter when you pass away.

Cash Value Accumulation: A portion of the premium payments goes into a cash value account, which grows over time and can be borrowed against or withdrawn. This can be a valuable financial tool for future needs such as college funding or retirement income.

Fixed Premiums: The premiums on a whole life policy are generally fixed and do not increase as you age or if your health status changes. This predictability makes budgeting easier.

Dividends: Some whole life policies are eligible to earn dividends, which can be used to decrease premiums, increase the death benefit, or even be taken as cash. This adds a potential return on the premiums paid.

Estate Planning: Life insurance can be a crucial component of estate planning, providing funds to pay estate taxes, cover final expenses, and offer an inheritance to your heirs.

What is Term Insurance?

Term insurance is a type of insurance policy that provides financial protection to the policyholder's family in case of the policyholder's untimely death during the policy term. Unlike life insurance plans, Term Insurance plans do not offer any savings or investment benefits. They are pure protection plans that provide a high sum assured at a low premium cost.Similar to life insurance, in Term Insurance also, the settlement of the sum assured is made to the policyholder's family in the unfortunate case of the policyholder's death during the policy term. However, the major difference in Term Insurance schemes is that if the policyholder survives the policy term, they do not receive any payout.

5 Benefits of Term Life Insurance

The benefits of term life insurance are:

Cost-Effective: Term life insurance is generally less expensive than whole life insurance because it covers a specific period and does not have a cash value component. This makes it more accessible, especially for young families or individuals on a tighter budget.

Simplicity: With simple coverage without the investment components of whole-life policies, term life insurance is easier to understand. You pay premiums for a certain amount of coverage over a specified term, and if you pass away during that term, your beneficiaries receive the death benefit.

Flexible Terms: You can choose the term that best suits your needs, aligning the length of the policy with critical financial responsibilities like your children's education or paying off a mortgage.

Convertible Options: Many term policies offer the option to convert to a whole life insurance policy without requiring a medical exam. This feature is beneficial if your health changes and you may not otherwise qualify for new coverage.

Temporary Coverage for Specific Needs: Perfect for covering specific financial responsibilities, such as raising children or paying off a loan, term life ensures that these needs are met during your untimely death.

Comparison of Life Insurance and Term Insurance

Now that we have understood what life insurance and Term Insurance are, let us compare these two types of insurance plans based on different parameters .

Types of Life Insurance plans

As mentioned earlier, there are various types of life insurance plans. Let us have a brief introduction to those plans.

ULIPs: ULIP stands for Unit-Linked Insurance Plan, which is a type of life insurance policy that also offers investment opportunities. Under a ULIP, the premium paid by the policyholder is divided into two parts: one part is used to provide life insurance coverage, and the other part is invested in the market through a variety of investment funds, such as equity, debt, and balanced funds. The policyholder can choose the investment funds based on their risk profile and investment goals.

Endowment Insurance Plans: Endowment insurance plans are a type of life insurance policy that provide both insurance coverage and savings opportunities. Under an endowment plan, the policyholder pays a premium for a specified term, which can range from 10 to 30 years or more. The policyholder is entitled to a sum assured or guaranteed payout at the end of the policy term, regardless of whether they survive the policy term or not.

Money-back Insurance Plans: Money back insurance plans provide periodic payouts to the policyholder during the policy term. These plans offer financial protection and also provide liquidity to the policyholder at regular intervals.

Whole Life Insurance Plans: Whole life insurance is a type of life insurance policy that provides coverage for the entire lifetime of the insured, as long as the premiums are paid on time. It is also sometimes referred to as permanent life insurance, as it does not have a set term or expiration date. Whole life insurance policies typically have higher premiums than term life insurance policies, but they also offer more comprehensive coverage and a savings component.

Child Insurance Plans: Child insurance plans are a type of insurance policy that provides financial protection and savings benefits for the policyholder's child. A portion of the premium is invested in various investment options. The policyholder’s family receives the sum assured along with any bonuses or returns at the end of the policy term or in case of the policyholder's untimely death. These plans also provide cash liquidity during the critical milestones of the child's education and other future expenses.

Retirement Insurance Plans: Retirement insurance plans, also known as pension plans, are insurance policies designed to provide financial security to individuals during their retirement years by providing a regular income to the policyholder after they retire.

The insurance company invests the premiums paid by the policyholder in various investment instruments to generate returns. At the end of the policy term or upon the policyholder's retirement, the insurer provides a regular income stream to the policyholder in the form of a pension.

Types of Term Insurance Plans

There are different types of Term Insurance plans available in the market, each designed to cater to different needs of the policyholders. Here are some of the most common types of Term Insurance plans.

Level Term Insurance

This type of Term Insurance provides a fixed sum assured to the policyholder’s beneficiaries in the event of the policyholder’s death during the policy term. The premium remains constant throughout the policy term.

Decreasing Term Insurance

The sum assured decreases over the policy term, usually at a fixed rate, while the premium remains constant. This type of policy is useful for those who have a specific debt, such as a mortgage, which decreases over time. This plan can be renewed.

Increasing Term Insurance

The sum assured increases over time, usually to keep up with inflation, while the premium remains constant. This type of policy is useful for those who want to ensure that the sum assured keeps up with the rising cost of living.

Renewable Term Insurance

This type of policy allows the policyholder to renew the policy at the end of the term, without having to undergo a medical checkup again.5. Convertible Term InsuranceThis type of policy allows the policyholder to convert the Term Insurance policy to a permanent life insurance policy, such as Whole Life or Universal Life, at the end of the term or at a specific point in time.

Convertible Term Insurance

This type of policy allows the policyholder to convert the Term Insurance policy to a permanent life insurance policy, such as Whole Life or Universal Life, at the end of the term or at a specific point in time.

How to Choose the Right Type of Insurance Plan?

Choosing the right type of life insurance is crucial as it provides financial security for yourself and your loved ones in the face of unexpected events. Here are these things that you need to consider when choosing the right type of insurance plan:

Assess Your Needs

Before diving into the different types of insurance, assess what aspects of your life need coverage. Are you looking for protection for your family after you're gone, medical expenses coverage? Each type of insurance serves a different purpose, so understanding what you need is the first crucial step. Analyse which life or term plan types align with the risks you most want to safeguard against.

Consider the Cost and Budget

Your budget is essential to the type of coverage you can afford. Higher premiums often mean more comprehensive coverage. However, it's critical to balance between paying a premium you can afford and getting sufficient coverage.

Research Insurers

Once you know what kind of insurance you need, research different insurance providers. Look for reviews and ratings to assess their customer service, claims handling process, and financial stability. Comparing different insurers can help you find the best coverage terms and competitive rates.

Read the Fine Print

Insurance policies can be laden with complex terms and conditions. Pay attention to exclusions, deductibles, and limits in the policy. Understanding these can prevent surprises when it comes time to make a claim.

Evaluate the Flexibility of the Policy

Consider how adaptable the policy is to changing circumstances. Can you adjust coverages? A good insurance plan offers some flexibility to adapt to your changing needs.

Seek Professional Advice

If you find the process overwhelming, consider consulting with an insurance broker or financial advisor. They can offer personalised advice based on your specific circumstances and help you navigate the complexities of different policies.

Check for Discounts and Combos

Many insurance companies offer discounts if you purchase multiple policies with them or meet certain criteria like being a safe driver or a non-smoker. Check if you're eligible for discounts that can reduce your overall cost.

Regularly Review Your Insurance Needs

As your life changes, so do your insurance needs. Regularly reviewing your policies ensures your coverage continues to meet your needs. This could be annually or during significant changes in your life, such as marriage, the birth of a child, or purchasing a new home.

About ACKO Life Flexi Term Plan

Regarding choosing the right life insurance, ACKO Life Flexi Term Plan is a unique plan with unmatched flexibility. It offers all-inclusive coverage and a financial safety net for your loved ones. With ACKO Life Flexi Term Plan, you can upscale or downscale your coverage at any juncture, aligning it precisely with your current life stage and financial aspirations. Whether you've bought a new home or started a family, this unique feature ensures that your insurance plan evolves with you. 

You can also add valuable add-ons such as ACKO Life Accidental Death Benefit Rider, ACKO Life Accidental Total Permanent Disability Benefit Rider, or ACKO Life Critical Illness Benefit Rider and personalise it based on your requirements. 

Find the right plan--->

How to balance the cost between Life Insurance and Term Insurance? 

As for the ideal percentage of the amount spent on Term Insurance and Life Insurance, there is no one-size-fits-all answer. The amount spent on insurance coverage will depend on the person's financial goals, income, expenses, assets, liabilities, and dependents. However, experts recommend that a person should have a Term Insurance coverage of at least 10–12 times their annual income. In contrast, the coverage amount for Life Insurance should be based on the person's financial goals and dependents.

Which is Better Between Life Insurance or Term Insurance?

Life insurance provides lifelong coverage, while term insurance gives temporary, affordable protection. Life insurance also builds cash reserves you can utilise. However, term insurance allows you to get larger coverage at affordable premiums. S, it depends on your specific needs and budget. 

For family breadwinners looking for an affordable way to protect income during their working years, term insurance may be suitable. On the other hand, life insurance would be better, though more expensive, for permanent income replacement and inheritance wishes. Moreover, consulting a financial advisor can help make the right choice.

Frequently Asked Questions (FAQs)

Here are some answers to the most asked questions related to life insurance and term insurance.

What are the tax benefits offered by Life insurance and Term insurance policies under Indian Income tax rules?

Under Indian Income tax rules, life insurance and Term Insurance policies offer tax benefits to policyholders. The premium paid towards these policies is eligible for tax deductions under Section 80C of the Income Tax Act. The death benefit received by the beneficiary is also tax-free under Section 10(10D) of the Income Tax Act.

What are the minimum and maximum age limits for buying insurance? 

The minimum age for buying an insurance policy is generally 18 years, whereas the maximum age limit differs based on the type of policy. For term insurance, the maximum age limit is usually around 65 years, while for whole life insurance, it can go up to 99 years.

Can I buy an insurance policy in my child's name? 

Yes, it is possible to buy an insurance policy in your child's name. Child insurance policies are designed to provide financial protection for children's future education and other expenses.

What are financial risks involved in investing in an insurance policy? 

One of the biggest financial risks involved in investing in an insurance policy is the possibility of the policyholder not being able to pay the premium. In such a case, the policy may lapse, and the policyholder may lose the benefits. Another risk is the possibility of the insurer going bankrupt, in which case the policyholder may not receive the promised benefits. It is important to carefully read and understand the terms and conditions of the policy before investing in it.

Can I purchase life insurance and Term Insurance online? 

Yes, you can purchase both life insurance and Term Insurance online in India. Many insurance companies offer online purchasing options, which are often more convenient and cost-effective than purchasing a policy offline.

What are the points I need to check before buying an insurance policy online?

Before purchasing a life insurance or Term Insurance policy online, it is important to compare the different policies and insurers to ensure that you choose the one that best fits your needs and budget. You should also read the policy documents carefully to understand the terms and conditions of the policy, including the coverage, premium payment schedule, and renewal terms.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes

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