Insurance is the key element that holds together a good financial planning exercise. As the life insurance market constantly evolves, various insurers offer multiple plans like protection, savings, and even investment plans that help in wealth creation. Term insurance plans and whole life insurance plans provide basic and exhaustive life insurance cover and are therefore preferred by most investors. Read on to find out the distinct features and multiple benefits of each to know how these are different.
Term Life Insurance
One of the popular life insurance products is term life insurance. Under this plan, the premium must be paid by the life insured for a specified time. During the policy period, the death benefits are to be paid out by the insurance provider in case of an untimely death of the life insured. If the policy matures, the beneficiaries receive no benefits. Thus, term insurance policies are also known as pure life insurance policies since they offer high sum assured with nominal premium payments and come with a fixed tenure. These insurance policies also offer flexibility in choosing sum assured and policy tenure.
It is important to note that the benefits of term insurance are limited when compared to other life insurance policies. For example, these policies have no maturity or survival benefits for the beneficiary. Hence, if one is looking for life insurance policies as an investment instrument then this is not a good option.
Additional Reading: What Are the Different Types of Insurance?
Whole Life Insurance
Whole life insurance plans are known as life insurance packages since they offer flexibility in choosing sum assured, policy tenure etc. These also provide survival and maturity benefits depending on the specifics of the policy documents. Under whole life insurance, the premium can be collected for a specified tenure or it can be paid throughout the term of insurance.
These policies are designed to allow the life insured to borrow money at a low interest rate and get a lump sum amount as survival benefit. The life insured can also receive segregated premium pay-outs, maturity benefits etc. under whole life insurance. Whole life insurance policies provide cover throughout the life insured’s complete lifetime.
Key Differences between Term and Whole Life Insurance
|Term Life Insurance||
Whole Life Insurance
|Very cost-effective and offers high cover at a reasonable premium||
Provides a longer tenure going up to 100 years of investor’s age
|Ideal for those who are looking for pure protection and a pre-defined term||
Helps in building a fund pool for future needs or leaving a legacy for one’s children and grandchildren
|Best suited if your dependents require protection to cover debts such as home loan||
Comes with maturity benefits and death benefits
|Provides various riders such as critical illness, accidental death, etc.||
Has the flexibility of withdrawing money for any urgent financial needs
Here are some of the main points that will help you to differentiate between Term Life and Whole Life Insurance.
Term insurance policies are available at lower premiums as compared to whole life policies.
In the case of whole life plans, the premium remains constant throughout the policy tenure, whereas, in case of term insurance policies the premiums are dynamic especially when the policy term is to be renewed.
Premiums are not refunded in any case for term insurance policies except for genuine claims in case of death of the life insured. In such cases, the sum assured is paid out by the insurance provider. On the other hand, whole life plans offer premium pay-outs if the life insured survives the entire policy tenure as agreed in the policy documents.
Term plans come with fixed tenures during which period, the benefits of the policy can be availed. Whole life, on the other hand, has flexible tenures covering a maximum of 100 years. Benefits are paid out on policy maturity.
Under whole life terms, the premium amount paid by the investor is allocated to a protection fund and alternate investment avenues. If the insurance provider makes profit out of these investments, a bonus is usually declared and a part of it is given to the investor. Term insurance does not carry this feature.
For whole life term plans, the cash value of all your premium payments can be used to avail loans at reasonable interest rates. The interest is accumulated and kept aside by the insurance provider and the base loan amount is reduced from the total sum assured. This has no impact on future premium payments. Term plans do not have this benefit.
Whole life plans can be considered as savings as well as protection plans and term insurance is only a life insurance plan which carries no additional benefits other than death benefits.
Which one is the better choice?
Normally, if you are unmarried and your age is in the 20s or 30s, a term plan can be the ideal option for you. It offers decent protection with nominal premium payments. If you have any major health issues, term plans are ideal for you in getting maximum benefits in a short time.
For married individuals who have dependents, a combination of whole and term life can be a great choice. One can buy a term rider along with the whole life policy. Whole life policy offers cash value which can be used throughout one’s life. The term rider, on the other hand, can protect the dependents by offering high monetary benefits.
For applicants over 40 years of age, whole life policies can be best suited. It offers cover throughout the life of the individual, while it is effectively cheaper as compared to term plans. An investor can be confident that his or her next generations will have a good inheritance in case of an untimely death.
Now that you have read up the differences of term life insurance and whole life insurance, an informed decision can be taken with regards to the best life insurance for you. In case of doubt, you can go for both whole life and term life policies. Changing term life to whole life insurance can also be a good choice if you wish to continue your life insurance policy alongside building a cash pool.