Before diving into the topic let us understand the basic definition of life insurance. Life insurance is a contract between the Insured (Policyholder) and the Insurer (Insurance Company) in which the insured agrees to pay at specified intervals of time for which the insurer agrees to pay a designated sum of amount to the family of the insured upon the death of the insured.
Term insurance and traditional life insurance are types of life insurance policies. In this article, we will discuss the difference between term insurance and traditional life insurance and the importance of term insurance over other traditional life insurance. The main difference between term insurance and traditional life insurance is the length of the coverage period. Term insurance lasts for a specific amount of years while traditional life insurance covers your entire lifetime. Below is a list of comparisons of the benefits of both of these insurance policies.
What is Term Insurance?
Term insurance is a form of life insurance in which the insured is provided with life insurance cover against death for a certain term (period). This term can range from 5 years to 60 years depending on the entry age of the insured and the type of policy.
In short, term insurance can be understood as a policy in which the insured pays a premium for a particular term chosen by him/her, and in case of the death of the policyholder, the claim proceedings are paid to his/her immediate family. There are different types of Term Life insurance policies
- Level Term Insurance Plan
- Increasing Term Insurance Plan
- Decreasing Term Insurance Plan
- Return of Premium Term Insurance Plan
- Term Plan with Riders
What is Traditional Life Insurance?
Traditional life insurance provides coverage for the entire lifetime and can be used to provide financial protection against unexpected events such as death, disability, or critical illness. It has cash values that can be used to fund retirement or other needs.
Traditional life insurance policy is also known as whole life insurance, money-back insurance, or endowment insurance. This type of life insurance policy provides multiple benefits like risk cover, fixed income returns, safety, and tax benefits.
The traditional life insurance policy also provides insurance coverage to the policyholder for his/her entire life. In case of the unfortunate death of the insured, the insurance payout is made to the policy's beneficiaries. There are different types of Traditional Life insurance policies
- Whole Life Insurance
- Money Back Policy
- Endowment Policy
- ULIP Policy
- Child Life Insurance Plan
- Investment Plan
Comparison of Benefits offered by Term Insurance and Traditional Life Insurance
| Benefit |
Term Insurance |
Traditional Life Insurance |
| Death Benefit |
Term insurance provides a death benefit if the policyholder dies within the period of the policy. |
Traditional life insurance policies provide death benefits plus a bonus if the insured dies during the policy period. |
| Maturity Benefit |
No maturity benefit is provided. |
Maturity benefit is provided if the policyholder survives during the policy term. |
| Premium |
Term insurance premiums are low compared to traditional life insurance. |
Traditional life insurance premiums are high compared to term life insurance. |
| Flexibility |
Term insurance is more flexible in terms of surrendering than traditional life insurance. To surrender a term insurance policy, the insured just needs to stop paying the premiums. |
In traditional life insurance policies, if an individual surrenders his policy before the completion of the policy term, then he will only be able to recover the paid-up value. |
| Tax Benefits |
Term insurance provides tax benefits under Section 80C under Section 10 (10D) of the Income Tax Act, 1961. |
Traditional life insurance also provides tax benefits under Section 80C under Section 10 (10D) of the Income Tax Act, of 1961. |
| Coverage Amount |
The term insurance coverage amount is high. |
Traditional life insurance coverage amount is low as compared to term insurance. |
| Loan Availability |
You can’t get a loan under a term insurance policy because term plans do not accumulate any cash value. |
You can avail of a loan against your traditional life insurance policy. The insurance company issues the loan based on the cash value of the policy. |
Importance of Term Insurance over Other Traditional Life Insurance
Term insurance is a type of life insurance that protects you against the risk of dying before your policy expires. It pays out a lump sum in the event of death, rather than an income stream like traditional life insurance. Term Insurance does not have any cash value. Term insurance can be cheaper than traditional life insurance because it does not pay out as much money if you die before your policy expires. Term insurance is also more flexible and allows you to customize how much coverage you want, and how long your policy lasts.
Mr. Gupta, aged 30 years and earning 20 Lac per annum was very much interested in the investment of his money. He had a diverse portfolio which included Mutual Funds, Real estate, Retirement funds, etc. When it came to life insurance he had invested in an Endowment policy thinking that it’ll solve his insurance needs. He was paying a premium of Rs.36, 789/- each year for a period of 20 years having a sum assured of 20 Lacs. He was confident of the bonus in addition to the guaranteed corpus of Rs. 20lacs on his death.
Mr. Gupta has invested in an endowment plan which, he believed, was sufficient enough to provide good insurance coverage and also yield good returns over some time.
Was he right in his decision? Sadly, No. Can you guess why?
Insufficient Financial Security for a Family:
Though Mr. Gupta has invested in life insurance it doesn’t solve the purpose of taking life insurance coverage. One important aspect to consider here is the financial security for the family in case of your demise. Below are the questions which need to be addressed properly before deciding on life insurance.
- What if Mr. Gupta unexpectedly expires tomorrow? Will his endowment policy provide sufficient financial security to his family?
- In today’s world, a middle-class family needs at least Rs.10 Lac per year to survive. With the 20Lac claim amount, his family would be able to survive only for 2 years.
- How will his family manage after his demise without proper financial security?
Life Insurance = Financial Security for family
Here comes the real meaning of life insurance; life insurance is a means of financial security provided to the family in case of the death of the policyholder.
Term Insurance for Mr. Gupta:
Assuming the above example where Mr. Gupta was around 30 years of age with an annual income of Rs 20 Lacs, he is eligible for at least 15 times coverage of his annual income which comes to around Rs. 3 Crore for which he would be paying a nominal premium of Rs. 30,000 per year for a period of the same 20 years.
In term insurance policy the claim is payable only on the death of the policyholder and no bonus is accrued at the end of the policy period. That is if a customer survives the policy term no amount is paid to him/her as a survival benefit, but if the customer expires unfortunately within the policy period, a designated amount (Sum Assured) will be paid to his family. The term insurance GST rate is 18% which includes the state and central tax.
If Mr. Gupta is to die tomorrow his family will be receiving the Sum Assured of Rs. 3 Crore which helps them settle financially. This is the advantage of taking a term insurance policy online over other traditional life insurance policies.
“Pure Term insurance only provides a death benefit.”
But these days’ term insurance products are also available with a return of premium option where the customer can pay a higher premium and opt for this option. This option enables the customer to get back his premiums paid at the end of the policy term. But the catch here is that there would be a deduction of premium for life insurance coverage.
Conclusion
The conclusion on the difference between term and traditional life insurance policies is that they are both good for different purposes. Term life insurance is better for people who want to protect their family's financial future in case of an untimely death. Traditional life insurance is more beneficial for people who want to protect their family's financial future in case of a long-term illness or disability.
PolicyBachat is an insurance web aggregator where life insurance comparison can be done using the life insurance premium calculator and the best life insurance plan can be selected depending on your premium paying capacity and your needs. Compare the advantages & disadvantages of term insurance and traditional life insurance products in PolicyBachat to get the best life insurance plan online.