Life insurance policy is a contract between the policyholder and the life insurance company where the insurance company provides a lump-sum payment, known as death benefit to nominees/beneficiaries upon the life assured’s death or maturity benefit at the time when the insurance plan matures in exchange for an amount known as premium to be paid by the policyholder.
Life insurance plans are of several types, designed for different people, depending upon their requirements. In India, the life insurance industry is largely growing. The various types of life insurance plans are based on essential categories or factors such as health, children, and retirement.
Among these different types of life insurance plans or policies, one that is often compared to the rest is the term insurance plan. Term insurance is different in many aspects from other types of life insurance plans. To understand the difference between term insurance and other types of life insurance, read on -
What is term insurance?
One of the most popular kinds of life insurance policies and plans in the country, term insurance is a plan that provides cover for a specific period to the life assured. A life insurance term plan is a plan where the nominee is paid the assured amount of money in case of the death of the life assured. Term insurance is cost effective. A term insurance policy ensures a higher amount of cover in exchange of a nominal premium. A term insurance policy should be availed after using a term insurance calculator, and analysing what premium and what amount of money would be the best fit for you and your loved ones based upon your income.
Term insurance is a good choice for anybody at all - whether you are a person who lives alone, or somebody with a small or big family. Term insurance plans are particularly made for all kinds of people and families, and it does not matter whether there is only one bread earner in the family or multiple. A perfectly planned term insurance policy which meets all your requirements and makes sure that you live your life without being too worried about your family's financial security in difficult times.
What are the other types of insurance plans available in India?
Apart from the term insurance policy, there are several other types of life insurance plans that are available in India –
1. Unit Linked Insurance Plans (ULIPs)
ULIP is a particular kind of insurance plan that is a long-term tool for investment. The minimum lock-in period of an ULIP is five years. This plan permits an investor to allocate money in different funds as per the investor’s choice and in line with the product terms and conditions.
2. Traditional Endowment Plans
A Traditional Endowment Plan gives a policyholder a chance for savings. There may be bonuses available periodically, which are added up and paid on the maturity of the plan or after the death of the life assured.
3. Whole Life Traditional Endowment Insurance Plans
This life insurance plan provides a whole life insurance cover to the life assured, up to a hundred years. The amount is paid to the nominee at the death of the life assured.
4. Child Insurance Plans
A child insurance plan brings together the benefits of life cover and savings so that you can plan to achieve your child’s life goals.
5. Pension Plans
A pension plan is to be availed for ensuring savings for a comfortable life after retirement. There are one-time payment as well as monthly or yearly payment options available in the pension plans.
Term insurance vs other types of life insurance plans
There are two broad ways or parameters to understand the differences between term insurance and other types of life insurance plans and policies.
In most cases of term insurance plans, the coverage is available only against premature death of the life assured. In case of a term insurance policy, the amount is paid only under the circumstance of the insured person's death within the tenure of the term insurance policy.
In case of other types of life insurance plans, there is a certain amount of maturity benefit added. These plans not only pay in case of a premature death, but also provide a benefit if the life assured survives until the end of the tenure of the policy.
Therefore, term plans and other life insurance plans are very different when it comes to the coverage.
However, in case of other life insurance plans, there are other features available. The endowment plan, for example, helps you to create a certain amount of money through the process of guaranteed returns. Other money-back policies with fluidity are available as well. There are child insurance plans that provide you with a corpus for your child for the times when you may not be there to look after the goals and dreams of your child. Unit Linked Insurance Plans, on the other hand, are there for you to help in generate market-linked returns.
The following are two major differences between term insurance and other types of life insurance -
- There are no bonuses available in term insurance plans. On the other hand, other types of life insurance plans may have bonus component, depending on the plan terms and conditions.
- Term insurance policy does not have paid-up values, unlike other plans such as endowment plans.
Similarities between term insurance and other types of life insurance
The similarity between a term insurance policy and other types of life insurance is that of the tax benefits and the death benefits. The premiums to be paid under both are permitted as a deduction of up to Rs. 1.5 lakhs, under Section 80C. The maturity benefit and death benefit paid under respective insurance plans is tax-free under Section 10 (10D). The above-mentioned tax benefits are subject to the provisions mentioned in the Income Tax Act, 1961, as amended from time to time. Also on the demise of the policyholder, a death benefit is paid to the nominee of the policyholder as per the terms and conditions specified therein.
Which one to choose according to your needs
There are a number of factors that you need to think over before deciding on which life insurance policy is perfectly fit for you. Life insurance term plans as well as the other kinds of insurance plans all have some relevance and benefits of their own.
A term insurance policy is for everyone because it provides financial security against premature death. Term insurance plans are one of the most popular and widely purchased insurance plans in India.
However, the other types of life insurance plans are particularly designed for different kinds of people with different requirements. You may look at the following to understand which plan is best suited for you depending upon your needs and targets -
- An endowment plan is for people with a low risk appetite who wish to create a guaranteed corpus.
- A pension plan is suited for people who wish to either create a retirement corpus or require regular income after their retirement.
- A child plan secures the future of a child in the absence of their parents.
- A money back plan is for those with a low risk appetite, who are looking for a guaranteed corpus but with liquidity.
- A whole life insurance plan is for people who want a lifelong coverage.
- A unit-linked plan is for people who wish to maximize their money with returns linked to the market, and with a high-risk appetite.
Therefore, a proper and close study of the entire term insurance vs life insurance plans would give you a detailed idea of the similarities and the differences between the two. Once you have understood what makes a term insurance policy different from other life insurance plans, it would be easier for you to realise which one is it that you need for your family's financial security.