As a young professional, investing in an insurance plan is one of the most important financial decisions you may make in your life. You may enjoy a range of benefits based on the type of life insurance you buy. If you look for the best life insurance online, you will come across many plans and tips suggesting you to buy different types of life insurance.
However, you must know that there is no one-size-fits-all kind of life insurance. You must choose the right life insurance based on your specific needs, affordability, and long-term financial goals. So, to make the right decision, you must be aware of the differences between term life insurance plans and other traditional life insurance policies.
Key differences between term insurance and life insurance
Traditional life insurance policies like endowment plans provide dual benefits of protection and investments/savings to the policyholders. If you have a conventional life insurance plan, you can save and accumulate money during the entire policy term and get maturity benefits.
On the other hand, term insurance is a pure protection policy and doesn’t have any savings or investment component. The insurance company pays the sum assured to the nominee in the event of your demise during the policy period. But you don’t get any maturity benefits if you survive through the policy term.
As the name suggests, a term insurance policy remains active only for a fixed term or tenure. It can be for 5,10,15, or 20 years, and you can choose the coverage term as per your needs. Traditional life insurance policies are more pliant and are usually applicable till the age of 100. There are also some plans like the whole life insurance that remains active until you are alive.
The premium for term insurance is the lowest among all life insurance plans available in India. The low premium makes it a popular and preferred insurance choice among people looking for basic life insurance plans and first-time insurance buyers. The traditional policies with savings or investment components have higher premiums.
The only similarity between term and life insurance is the tax benefit. Under Section 80C of the Indian Income Tax Act, both term and life insurance policies are eligible for tax benefits under Section 80C of the IT Act. You can get a deduction of up to 1.5 lakhs in a financial year. Also, it is worth noting that the death benefits your family may receive is tax-free.
One of the major differentiating factors between term insurance and life insurance policy is the flexibility you get with terminating the policy. Surrendering a term life insurance is easy. You just stop paying the premium, and the policy will lapse.
However, surrendering life insurance is much more complicated. If you surrender the policy before a certain fixed period, the insurer will only return the premium you have paid so far. You may have to pay the premium for the entire policy duration to get the accrued benefits from the savings portion.
Also, you can easily renew the lapsed term plan within a specific period by paying the premium amount for the duration when the policy was inactive. And you even get the option to convert your term plan to an endowment life insurance plan for the same sum assured but with an adjusted premium. However, you cannot convert your life insurance to term insurance.
Thus, both term insurance and life insurance serve specific purposes. As a young professional, it is up to you to decide what you want and choose the right type of insurance to suit your needs.
If you are looking for a basic protection policy, term insurance could be the right choice. But, if you want to start saving for the future and build wealth while getting insurance protection, you can choose a traditional life insurance policy.