We all know that life insurance is important because it helps you cover the risk that comes with the unfortunate demise of the breadwinner in a family. However, when buying life insurance, it is important to understand the two main different types of life insurance available and make the correct decision.
Term plan and whole life insurance are two main types of life insurance. Let us first take a look at their features.
Here, the policyholder pays the premiums for a specific period of time. In case the policyholder passes away during that period, the insurance company will pay the death benefits to the nominee. If the policyholder survives the term, no such benefit is provided. Term insurance plans usually provides coverage until 60-65 years or till the person is working.
As the name suggests, such insurance provides protection for the whole life of the insured. So, they generally come with an upper age limit of 100 years. So, it is also known as a permanent life insurance policy. However, these plans also have an investment component. So not only there is a death benefit, there is also a maturity and survival benefit.
Let us look at the three main differences between a term plan and a whole life insurance plan in greater detail.
As we have seen a term plan provides coverage for the given term which could be 5, 10. 15, 20, 25 or 30 years, while a whole life insurance policy provides coverage for life. However, as we will see next, the premiums for a term insurance plan are much lower than a whole life insurance plan. So, it is possible to take a coverage of a high amount like Rs 1 core or more for a term plan for a reasonable premium which is not possible in case of whole life insurance plan.
Premiums for term plans are much lower as the entire premium amount goes towards providing life cover. The premium for whole life insurance is much higher as a part of the premium is meant for providing life cover, while another part is invested. In an event that the policyholder surrenders or survives the term, the accumulated amount is returned to him according to the sum assured. If there are profits earned on the investment amount, policyholders may even earn a bonus.
As we have seen, a certain part of the premium for whole life insurance is invested. So, a cash value gets built over a period of time. Policyholders are eligible to avail loans at lower interest rate against such policies. Policyholders may also withdraw a part of the cash-value during the policy period. At the time of maturity, the money is paid out to the policyholder. This can be taken as a lump sum or as regular income at periodic intervals.
As we have seen, both these plans come with a different set of features. At one level, whole life policies seem to have some benefits- first, that the coverage is for the whole life and also there are guaranteed pay outs at the end.
However, EZTax.in recommend going for a term plan and not to mix insurance with the investment. This is because the rate of return on insurance plans is low and in the range of 4-5 percent. Also, the premiums are much higher for a given coverage. The money that you save on premiums can be invested separately for much higher returns.
It is recommended that one buys a term plan as soon as one starts working as the premiums are lower when one’s age is low and it stays constant for the entire term. Also, insurance agents have a higher commission when they sell you a whole life term insurance policy so whole life term insurance policies are also mis-sold.
Understanding the difference between a term plan and a whole life insurance is important to make the right decision when buying life insurance.