Life insurance and term insurance are two types of insurance that help protect you and your family financially. They both give money to your loved ones if something happens to you. But they work differently, so it’s important to know the differences before you decide which one to get. In this article, we’ll discuss the importance of these insurance types and highlight their differences to assist you in selecting the most suitable option.
What is Life Insurance?
Life insurance is like a safety net for your family’s finances if something happens to you. With this plan, you pay money to the insurance company regularly. If you pass away, the company gives a certain amount of money to your family. Some life insurance plans also give you money back when the plan ends. There are different types of life insurance, like Endowment, Money-back, and Whole Life plans, which not only protect your family but also help you save and invest your money.
What is Term Insurance?
Term insurance is a type of insurance that helps your family with money if you pass away while the insurance is active. But unlike other types of insurance, term insurance doesn’t give you any money back if you don’t use it. It’s like a safety net for your loved ones, and it’s usually cheaper compared to other plans. If something happens to you during the time you have the insurance, your family gets a lump sum of money. But if you stay healthy and nothing happens, you don’t get any money when the term ends.
Comparison of Life Insurance and Term Insurance
Now that we know what life insurance and term insurance are, let’s compare them using different factors.
LIFE INSURANCE
- Purpose: Life insurance plans do two things: they protect your family’s finances, and they help you save and invest for your future goals.
- Coverage: These plans cover you for your whole life.
- Sum assured: Life insurance plans give you less money in case something happens to you. That’s because they also help you save and invest some of the money you pay.
- Cost of Premium: Life insurance plans cost more because they do both things – protect you and help you save and invest. The price depends on your age, health, lifestyle, and how much coverage you want.
- Death Benefits: If you pass away, your family gets a payout from the insurance.
- Maturity Benefits: When the policy ends, you get a lump sum of money.
- Term Period: Life insurance plans last a long time, like 10, 15, 20, or even 30 years.
- Tax benefits: You can get tax benefits for the money you pay and the money your family gets if something happens to you.
- Flexibility: You can change how much coverage you have, how much you pay, and how long it lasts during the policy.
TERM INSURANCE
- Purpose: Term insurance plans are just for protecting your family if you pass away suddenly.
- Coverage: They only cover you for a set number of years that you choose.
- Sum assured: You get more money if something happens to you, and it costs less. That’s because it’s only for protection, no savings or investments.
- Cost of Premium: Term insurance plans cost less because they’re just for protection. The price depends on your age, health, lifestyle, and how long you want it.
- Death Benefits: If you pass away during the time you picked, your family gets money.
- Maturity Benefits: There’s no payout when it ends because it’s only for a certain time.
- Term Period: It can be short, like 1 year, or longer, up to 40 years.
- Tax benefits: You can get tax benefits for the money you pay and the money your family gets if something happens to you.
- Flexibility: You can’t change much during the term, but you can choose to renew it when it ends if you want.
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: A ULIP, or Unit-Linked Insurance Plan, combines life insurance with investments in stocks and bonds, offering customization based on risk and goals.
- Endowment Insurance Plans: Endowment insurance plans are a special kind of life insurance that does two things: it give you insurance coverage and helps you save money. When you have this plan, you pay money for a certain number of years, which can be a long time, like 10, 20, or 30 years. At the end of this time, you get a guaranteed payout, even if you’re still alive.
- Money-back Insurance Plans: Money-back insurance plans are a type of insurance that gives you money at different times while the policy is active. So, you not only get financial protection, but you also get some cash regularly during the policy term.
- Whole Life Insurance Plans: Whole life insurance is a special kind of insurance that covers you for your whole life, as long as you keep paying your premiums on time. It doesn’t have a specific end date. While it costs more than some other types of insurance, like term life insurance, it gives you more extensive coverage and also helps you save money over time.
- Child Insurance Plans: Child insurance plans support your child’s future by combining insurance and investments. If you pass away or when the plan matures, your family receives a sum, including bonuses, which can be crucial for significant expenses like education.
- Retirement Insurance Plans: Retirement insurance plans, often called pension plans, are like a financial safety net for when you stop working. These policies give you a regular income after you retire so you can have financial security during your retirement years.
The insurance company takes the money you pay in premiums and invests it to make more money. When your policy ends or when you retire, the company gives you a regular income, sort of like a paycheck, called a pension.
Types of Term Insurance Plans
There are different types of Term Insurance plans to meet different needs. Here are some common ones:
- Level Term Insurance: This plan gives a fixed amount of money to your loved ones if you pass away during the plan. The amount you pay stays the same.
- Decreasing Term Insurance: With this plan, the money your family gets decreases as time goes on, but what you pay stays the same. It’s handy if you have a debt that’s getting smaller, like a mortgage.
- Increasing Term Insurance: Here, the money your family gets increases over time to keep up with higher prices, but your payments don’t change. It’s good if you want to make sure the money keeps its value.
- Renewable Term Insurance: You can renew this plan when it ends without needing another health check.
- Convertible Term Insurance: This plan lets you switch to another type of insurance, like Whole Life or Universal Life, when the term ends or at a set future time.
How to choose the right type of insurance plan?
Picking the best life insurance for someone depends on their money goals, like saving or protecting their family. It also depends on how much money they make, spend, own, owe, and who relies on them. Once we know all these things, we can figure out the right kind of insurance. How much they should spend on Term Insurance and Life Insurance also changes based on their unique situation. So, after we understand their money goals, income, spending, assets, debts, and family, we can choose the right insurance for them.
How to balance the cost between Life Insurance and Term Insurance?
There’s no set rule for how much you should spend on Term Insurance and Life Insurance because it varies for each person. It depends on things like your money goals, how much you make, spend, own, owe, and who relies on you. But experts suggest that you should have Term Insurance worth about 10–12 times your yearly income. For Life Insurance, it should match your goals and the people who count on you.