Term Insurance V/s Whole Life Insurance

Human beings are always more exposed to different types of risks in their lives. These risks affect families and properties and therefore involve huge losses. Getting yourself insured automatically reduces the cost of financial loss and the effect of loss due to different types of risks. One cannot stop death or other uncertainties but buying an insurance policy would certainly protect you against the loss by compensating for loss. Especially the death of the earning member of the family creates a financial as well as an emotional crunch in the lives of the family members surviving.

You cannot fill the void or overcome the grief due to the death of your earning family member, but can certainly transfer his financial accountabilities to Insurance in the form of term/life insurance to be precise. But having a sound understanding about the types of insurance i.e. term insurance and whole life insurance would actually help you take a right decision before buying one. Though some people are aware of the reason to buy an insurance policy, many still wonder “WHICH” one to opt for! Let’s understand the difference between Term life insurance and Whole life insurance.

What is Term Insurance?

Term insurance is a “no frill” type of life insurance that provides coverage only for a particular ‘term’ or for a defined number of years. These terms can be for 10, 20 or 30 years. It is a “pure” life insurance simply because you actually pay for the value of the death benefit payable to your family members in the form of premiums. Term insurance is actually designed to safeguard you from uncertainties.

How does Term Insurance Work?

It is important for you to decide the “sum assured” before you buy a term insurance plan. You can derive this only after considering your outstanding loans and lifestyle. If you die, the insurance company pays this sum assured in the form of a death benefit to your nominee. The survivor may then pay-off your outstanding loans and keep some amount for daily expenses. However, if you outlive the policy term, no benefit is paid to you or your nominee.

Term insurance doesn’t offer any maturity benefits. It is advisable to opt for a term plan at a young age for cheaper premiums. Because statistics prove that a person is less likely to die at a younger age of 25 to 35 years than 50 to 60 years. In term insurance, your premiums are guaranteed to remain the same for the entire term.

What is a Whole life insurance?

A whole life insurance policy usually serves as an instrument for investment purpose and provides you protection for your entire life or up to 100 years whichever is the earliest. These plans are life insurance plans that offer you flexibility to choose the sum assured and the tenure of premium payment. It also offers survival/maturity benefits to you and death benefit in your absence to your beneficiaries. These plans are designed to exist until you die. The Whole life insurance comes with a cash value.

How does Whole life insurance work?

If you wish to buy a whole life insurance, you need to pay the premium every year. The premiums are then divided for two purposes. One portion of the premium paid would be utilized for your protection and the other portion would be invested by the company. If the investment makes any profit, you would be eligible to receive a bonus. These bonuses are accumulated over a period of time.

If you choose to withdraw the policy or surrender or if you outlive the policy, the insurance company returns the investment that has grown in value as maturity benefit. In case you die before the maturity period, the insurance company would pay the sum assured to your beneficiaries along with the accumulated bonuses.

It is advisable to buy a whole life insurance at the age of 40 or above. This is because people generally prefer to leave a legacy for their loved ones and if you survive the term you can yourself enjoy the proceeds of your investment.

Difference between Term and Whole Life Policies

Choosing between term insurance and whole life insurance can be a daunting task. But you can ease out things simply by taking the stages in life into consideration. These two plans are not designed for the same purpose. Let’s find out the difference between term and whole life insurance:

Type of cover & period

Term insurance plans are pure protection plans and are easy to understand. Whereas Whole life insurance plans are investment cum protection plans and are more complex to understand. Term plans usually cover for a limited time duration, usually between 5 years to 40 years or until age 75 years to 80 years. Whereas whole life insurance plans covers you for your entire life i.e. till you attain age 100.

Premiums

The premiums for term insurance policies are cheaper than whole life insurance plans. The premiums are constant for both i.e. Whole Life and Term Insurance Plans.

Maturity amount

In term insurance, no maturity benefit is paid except in return of premium plan. Whereas in case of a whole life insurance, you are eligible for a maturity value basis the sum assured and the bonuses offered.

Flexibility

Term insurance plans don’t provide any loan option or surrender option except for single and limited pay plans. Whereas, whole life insurance plans offer you an option for taking a loan or surrendering the plan and getting the appropriate surrender value depending upon the year of surrender. The premiums paid for the whole life insurance are invested in protection fund and investment avenues. In case the insurance company makes any profit on such investments, then a bonus is given to the insured. However, in term insurance, this benefit is not available.

Right time to buy

Term insurance should be bought if you have major expenses or burden like paying off your outstanding loans, mortgage of the property or children education. You can buy whole life insurance if you are looking for an investment or building your legacy post your demise, as it has guaranteed coverage for lifetime.

What should you opt for?

If you fall into the age group of 20 to 30 and are unmarried, you should ideally opt for a term plan. You can avail good protection with a cheaper premium. A whole life insurance would be suitable in case you are above 40 to 50 years married individual with grown-up kids and a dependent spouse. It can certainly help you to save your dependents future. But, again be cautious while selecting the amount to be deducted towards risk cover. Ideally, this amount should be as low as possible. It is advisable to opt for riders that would help you to retain insurance benefits as per your age.

Give your family a chance to lead a stress-free life once you are gone. If you are still confused and don't know WHICH plan to opt for, our insurance experts are just a call away. You can reach out to us on our toll free number 1800-209-9920 for any queries.