This term Insurance vs. Life Insurance confusion bothers many. Every Indian cherishes their family deeply and strives to safeguard them, especially concerning financial and health matters. However, our fears often lead us to consider fancy insurance plans like money-back, endowment, and guaranteed income, sometimes taking advantage of our concerns.
Curious about life insurance? Wondering how it works and whether term or whole life insurance is better? You’re not alone. Here, at Bullsmart, professionals simplify concepts for you, offering insights to help you choose wisely and correct any missteps.
What is Life Insurance?
Life insurance is a contractual agreement where an insurance company promises to pay a sum of money to designated beneficiaries upon the insured person’s death.
Before we proceed, let’s learn about two key terms that will help us us gain a better understanding of the topic:
Insurance Premium
Premium is the amount(money)/ (or simply fees) you pay annually to your insurance company for getting that insurance coverage.
Insurance Cover
Cover is the total amount (protection amount) you get by insurance company when you claim insurance.
For Example
Rajesh has a life insurance policy of 1 crore rupees. If he passes away during the insurance period, the company will pay 1 crore rupees to his family–that’s the cover amount. To maintain this insurance, he pays 10,000 rupees annually to the insurance company, which is his yearly premium.
5 Types of Life insurance
1. Traditional Plans
This type of insurance provides both protection and savings. If the policy holder passes away during the policy term, their family receives a death benefit. Moreover, the policy holder is eligible for a maturity benefit if they happen to survive the policy term, which includes the accumulated savings and bonuses.
2. Whole Life Insurance
Whole life insurance provides coverage for a person’s entire life or until they reach 99 years of age. This plan offers lifelong protection, investment opportunities, and tax advantages. You can also choose to pay premiums in a single payment, over a limited period, or with variable payments.
3.Term Insurance
Term insurance is like a time-bound shield-it protects you for a set period, say 30 years. If the insured passes away during this term while the policy is active, a death benefit is paid out. Typically, premiums remain steady throughout the policy’s duration. Moreover, many terms policies allow you to convert permanent insurance, providing flexibility as your needs evolve.
4. Unit Linked Insurance Plans (ULIPs)
ULIPs are insurance-cum-investment products that allow policyholders to invest in various funds such as equity, debt, or hybrid funds. A portion of the premium goes towards providing insurance coverage, while the remaining is invested in the chosen funds. The returns on ULIPs depend on the performance of the underlying funds and are subject to market risks.
5. Pension Plans
Also known as retirement plans, pension plans help individuals save money for their post-retirement years. Contributions made during the policy term accumulate and are used to provide a steady income stream after retirement, ensuring financial security during old age.
History of Life Insurance in India
Life insurance in India dates back to 1818, when the Oriental Life Insurance Company, the first company offering life insurance coverage, was established in Kolkata. Over the decades, the industry has evolved significantly.
In 1956, the Life Insurance Corporation of India (LIC) was formed after the government nationalized the insurance sector, becoming the dominant player. This move aimed to spread life insurance benefits to more Indians, promoting financial security. Subsequent reforms in the 1990s opened the sector for private players, fostering competition and innovation.
Today, India’s life insurance market is vibrant and diverse, offering a range of products catering to various needs and preferences, marking a journey from its humble beginnings to a crucial component of financial planning for millions.
Other plans that existed previously have since been consolidated into the ones mentioned above. Now that we have an understanding of the types of insurance plans available, the two most debated are:
Term Insurance vs. Life Insurance
Now, let’s explore what typically happens when we choose an insurance plan or how we go about selecting one.
According to professionals and experts, selecting the right insurance plan involves understanding what suits you best. It’s more than just purchasing a policy; it’s about ensuring you’re prepared for whatever challenges life may bring.
Here are 7 key differences between Term Insurance and Life Insurance, supported by facts and figures, to aid in making an informed decision when choosing an insurance plan.
- We’ve already discussed the definitions of term insurance and life insurance. Now, let’s clarify by considering the situations of Mr. Sharma and Mrs. Patel, highlighting how their priorities influence the choice of their insurance plan.
| Comparison | Mr. Sharma (Term Insurance) | Mrs. Patel (Life Insurance) |
| Profile | Software engineer in his early 30s, with a growing family and future aspirations. | Homemaker focused on traditional financial planning for family security and long-term goals. |
| Insurance Type | Term Insurance | Life Insurance |
| Purpose | Provides financial security to his family in case of his untimely demise during the policy term. | Secures family’s future in case of her death while building a financial corpus over time. |
| Benefits | Offers a lump sum (death benefit) to his loved ones if he passes away during the policy term. | Combines death coverage with maturity benefits, nurturing long-term financial growth for her family. |
| Coverage | High coverage with relatively low premiums for a specific period (e.g., 30 years). | Comprehensive coverage including investment opportunities to grow savings. |
| Focus | Pure protection plan ensuring immediate financial support for family’s livelihood and dreams. | Dual benefits of protection & investment, catering to long-term financial planning and growth. |
| Flexibility | Provides the option to convert to permanent insurance for extended coverage needs. | Offers various investment avenues to build wealth over time, enhancing financial security and stabilty. |
| Sustainability | Ideal for individuals seeking affordable, high-coverage protection for a specific term. | Suited for those prioritizing both immediate financial security and lon-term financial goals, integrating protection with wealth accumulation. |
Key Differences Between Term Insurance and Life Insurance
| Aspect | Term Insurance | Life Insurance |
| Premium/Cover | Low premiums, high coverage | Higher premiums,lower coverage |
| Tenure | Typically, Shorter (5-35 yrs.) Coverage Time | Short to long term, varies scheme to scheme |
| Policy Type | Pure risk protection, no maturity benefits | Has maturity Benefits with insurance |
| Tax Benefits | Tax benefits under Section 80C | Tax benefits under Section 80C |
| Loan Benefits | Generally, not available | Can avail loans against the policy’s cash value |
| Flexibility | Limited flexibility | More flexible options |
| Bonus/Add-ons | no bonuses or additional benefits | Bonuses and extra benefits possible |
Which one you should choose term insurance or life insurance???
It depends on what you need. If you just want insurance, term insurance might be better. But if you want to save money too, life insurance could work.
- First, it’s important to decide whether you’re looking for an insurance plan or an investment plan.
For instance, if you opt for a term insurance plan with a 1 core cover, you’d pay approximately 1000 rupees per month. However, this plan offers no maturity benefits or returns.
- On the other hand, if you choose a life insurance policy for the same 1 crore cover, you’d pay around 16,500 rupees per month. Here, you not only receive the coverage but also stand to gain total returns of approximately 3 crores upon maturity.
Sounds like wow!
But wait, it’s only a return of 7.2% CAGR on your investment! There is another angle that we will discuss ahead: some smart ways on how you can get returns up to 10 crores at the same time, along with insurance cover of Rs. 1 crore at a much lower premium.
But before that, have a look at the table below to see how the premium differs in case of term insurance and life insurance:
| Aspect | Term Insurance | Life Insurance | |
| Monthly Income Plan (MIP) | Assured Wealth (AWP) | ||
| Cover | Rs. 1 Crore | Rs. 1 Crore | Rs. 1 Crore |
| Premium (approx.) | 1,000 per month Or 12,000 per year | 16,788 per month Or 2 Lakhs per year | 83,000 per month Or 10 Lakhs per year |
| Premium Paying Tenure (PPT) | Till policy coverage | 25 years (may vary in different schemes) | 12 years |
| Annual Returns (CAGR) | – | 7.2% | 7.2% |
| Maturity Benefits | No benefits | 2,40,000 per year after 25 years, till 85 years of age and One time, 1 Crore(maturity) at 85 years of age. | One time maturity of 2.97 crores after 20 years. |
| Total Returns | – | Around 3 Crores (Including Monthly and one-time maturity return) | Around 3 Crores |
From the table, you can see that in a term plan, you get a cover of 1 crore at a very low premium of only 1,000 rupees per month. However, you won’t receive any returns at the end of the policy tenure.
On the other hand, with life insurance, although the premium is high at 16,500 rupees per month, you receive a cover of 1 crore and approximately 3 crores on maturity.
So, is there any option that you can get insurance cover of 1 Crore and also returns up to 10 crores at very low premium, guess how much??
The answer is “yes”. Let’s decode it!
Here’s a smart trick: You can get both insurance and savings (way more than maturity insurance plans) at a very low monthly payout/premium by following this plan:
Using combination of term insurance and mutual funds. Instead of paying a lot for life insurance, you pay less for term insurance and invest the rest in mutual funds. This way, you could end up with more money in the long run.
Here’s how you can implement this:
Smart Way to Buy an Insurance Plan
Here’s an exemplary step-by-step calculation:
1. Monthly Insurance Premium: Instead of paying 16,500 rupees per month for a life insurance premium, opt for a term insurance plan with a much lower premium of 1,000 rupees per month. This plan provides a 1 crore cover.
2. Investment in Mutual Funds: Allocate the remaining 15,000 rupees per month to invest in top-performing mutual funds or index funds through SIP over 25 years, with different interest rates applicable.
- Calculate the total investment:
| SIPAmount (INR) | Tenure (Years) | Interest | Investment Value (INR) |
| 15,000 | 25 | 8 | ₹1,43,60,499 |
| 15,000 | 25 | 12 | ₹2,84,64,526 |
| 15,000 | 25 | 15 | ₹4,92,61,106 |
| 15,000 | 25 | 18 | ₹8,73,49,682 |
This approach allows you to secure a substantial insurance cover while simultaneously building significant wealth through a disciplined investment ia mutual fund. SIP helps big-time when combined with mutual funds.
Bottom Line
When it comes to securing your financial future and that of your loved ones, why not get the best of both worlds? Choosing term insurance ensures high coverage at a low premium, providing your family with a safety net in case something happens to you. But here’s the real kicker: by investing the money you save on those lower premiums into mutual funds, you can watch your wealth grow significantly over time.
Unlike traditional life insurance, which combines insurance and savings with modest returns, term insurance paired with mutual fund investments can yield much higher returns. The magic lies in the power of compounding—your investments in a mutual fund through a disciplined SIP can potentially grow into a sizeable nest egg, outpacing the maturity benefits of a standard life insurance policy.
So, why settle for less when you can have it all? With this smart combo, you get robust financial protection and substantial wealth creation. It’s like having your cake and eating it too—ensuring your family’s financial security while building a prosperous future. Think of it as the ultimate financial hack for a secure and affluent tomorrow.
FAQs
Is term Life Insurance suitable for everyone?
It is best if taken with the purpose of insurance, may not seem attractive for those who are looking for insurance cum investment plan, but term insurance can be utilized efficiently with Mutual Fund SIPs (Systematic Investment Plan).
Can I switch from term to permanent life Insurance plan later?
Yes, you can switch from a term to a permanent life insurance plan later. The general process involves contacting your insurance provider and filling out a form to convert your policy.
What factors affect life Insurance premiums?
Factors affecting life insurance premiums include age, health, lifestyle habits (like smoking), occupation, coverage amount, and policy duration.
Is term insurance same as life insurance?
No, term insurance and life insurance are different. Term insurance provides only death benefit until policy period, while life insurance provides both protection and investment option.
