When it comes to our loved ones, life insurance is perhaps the most vital financial tool we can have. It is like coverage for the future of our loved ones, even without us, they will be able to get money to take care of their needs.
But then the catch here is that there are different kinds of life insurance, and the two most common among them are life term insurance and regular life insurance. They both have similar-sounding names, but they work quite differently.
Then what should you choose? Let’s dispel the myths the simplest way possible so that you can make the best decision for your family.
What is Life Term Insurance?
Life term insurance is a type of policy that covers you for a specific duration of years, called the “term” of the policy. It can be 10, 20, 30 years, or even more.
If any untoward incident occurs to you during this time, your dependents get a lump sum payment called the “sum assured.” But if you survive the policy term, nothing comes back to you.
It’s paying a small amount per month for protection, but when you depart, you don’t get anything back. But you’ve got peace of mind during your stay.
What is Traditional Life Insurance?
Traditional life insurance includes protection and savings. It offers life cover, and if you survive the policy duration, you get paid back in the form of maturity value, bonuses, or assured return.
It’s like buying a flat, you pay more, but eventually, you get something. In addition to security, you get an asset.
The Difference Between the Two
Now, where the general public gets confused. Both are “life insurance,” but operate differently.
A term insurance policy is simply protection at a cheap cost. Traditional life insurance is protection and savings, but at a higher cost. Choosing between the two is a matter of priorities. Do you want more coverage for less price or coverage and savings bundled into one policy?
Key Differences Between Life Term Insurance and Traditional Life Insurance
Alright, now let’s compare them in textual form so it’s more readable. The main use of life term insurance is to give you pure life cover, while traditional life insurance gives you life cover and savings or investment gains.
When compared to the premium cost, term insurance is much more affordable. You can get a large amount of cover for a very small annual premium. Conventional life insurance is costly since part of your premium is saved or invested, though.
In regard to payment, term life insurance pays only if the policyholder dies during the policy period, while normal life insurance pays if the policyholder dies or if the policy matures earlier of the two events.
Return is the second difference. There is no maturity benefit in term life insurance, and you get nothing back if you survive the term. Guaranteed returns or bonuses on maturity are given by regular life insurance, however.
Even coverage amounts are different. Term insurance offers greater coverage, typically as high as ₹1 crore or more, at a cheaper rate. Traditional life insurance offers less coverage for the same price because some amount is also invested in savings.
Advantages of Life Term Insurance
- Low Premiums – You can purchase a ₹1 crore cover for hardly a few thousand rupees every year.
- High Protection – Your family gets a large amount if you die an unexpected death.
- Flexibility – You have the flexibility to choose a policy duration according to your needs, e.g., until your kids are independent.
- Easy to Understand – No complicated bonus or investment terms.
Classic Life Insurance Benefits
- Protection + Savings – Gives you protection cover along with a maturity value.
- Disciplined Savings Habit – Transforms you into a regular saver with no desire to splurge.
- Guaranteed Returns – Certain returns are assured by some plans, and you know exactly what to look forward to.
- Long-Term Financial Planning – Provides for a financial buffer for long-term needs like education or retirement.
Which One Should You Choose?
If you want low-cost, high coverage and do not care if you are not repaid at the end of the term, go for term insurance.
If you want protection as well as savings in one scheme and are willing to pay a little extra premium, choose traditional life insurance.
Example to Make It Clear
Let us assume we have two friends, Ravi and Manish.
Ravi buys a term insurance policy for ₹1 crore, paying a premium of ₹12,000 annually. He invests the rest of the money in mutual funds and fixed deposits.
Manish buys a traditional life insurance policy with a sum assured of ₹20 lakh at an annual premium rate of ₹50,000. At maturity of the term, he gets ₹25 lakh as maturity value.
Ravi, after 20 years, has a bigger corpus from his other savings and had a massive cover meanwhile. Manish gets less payout but had protection and savings under one plan. Both are correct, it all depends on what you desire.
Points to Keep in Mind Before You Make Your Choice
- Your Budget – Do you have sufficient funds to spend more on conventional policies?
- Your Financial Goals – Do you want only protection or protection and savings?
- Your Other Investments – If you currently have investments elsewhere, term may suffice.
- Your Health and Age – Premiums are lower when you’re healthy and young.
Common Misconceptions About Life Term Insurance and Traditional Life Insurance
Myth 1: Term insurance is a waste of money because you get nothing back.
Truth: Protection, not returns, is the priority here. You don’t “get back” your car insurance but it pays for you when required.
Myth 2: Traditional plans always give high returns.
Truth: It gives stability but generally lower returns than other investments.
FAQs
Q1: Can I have both term insurance and traditional life insurance?
Yes, most people have a term plan for high cover and traditional for disciplined investment.
Q2: Which is more suitable for young professionals?
A term insurance policy is generally more suitable because it’s low cost and provides high cover.
Q3: Am I able to switch from traditional to term insurance?
You may abandon one plan and purchase another, but examine whether there are surrender charges.
Conclusion:
It is similar to deciding whether to rent or buy a home. Renting (term insurance) costs less and offers freedom, but buying (traditional insurance) costs more but gives an asset ultimately.
If you want pure protection at minimum cost, choose a term insurance policy. If you want protection along with savings in one plan, choose traditional life insurance.
The most important is to have life insurance because whatever policy you choose, it’s the promise that your loved ones will be financially stable even if you’re not around anymore.