The difference between term plan and life insurance is about the maturity benefit only. Life insurance and term insurance both provide life risk cover. The life insurance policies also provide maturity benefit but in case of term insurance,no maturity benefit is given.
Life Insurance definition
Insurance is typically a legal contract between insured/proposer ( YOU ) and life insurance company to pay a promised Amount of money ( sum assured) to the nominee in case of any eventuality (death) with the life insured happen.
What is Life Insurance in simple words
In life insurance contract policy -you pay money ( premium )to the company and the company promises to pay pre-decided sum after a few years and in case you do not survive the policy term then the company will pay sum assured ( Money).
Term insurance Definition
Term plan is a type of life insurance policy which provides pure risk protection to the policy holder at a comparative lower prices.
Since Term insurance is a pure risk cover plan, it does not provide any maturity benefit to you.
Understanding Life Insurance Vs Term plan -example
Life insurance Example
For Example Bestii Singh 34, buys a life insurance policy for a term of 21 years I.e. till age 55 yrs, sum assured 5 lac.
In case of his death the company will pay Rs 5 lac and bonus ( if applicable) to the nominee.
If Bestii survives the policy term, He will get an assured 5 lac and bonus ( if applicable).
Term insurance example
Now Mr Bestii Singh choses Term insurance for the same term of 21 years that is still age 55, for sum assured 1 crore.
In case of death during 21 years of policy term, the company will pay 1 crore to the nominee.
If Bestii survives the policy term, he will not get anything in return. (NO MATURITY Benefit).
Important terms
| Policy term/tenure | Policy term is the length of time for which you have life insurance cover. |
| Premium | Amount of money you pay on monthly/ quarterly/ half yearly /yearly /one time or for a limited time. |
| Sum Assured /Life Cover | The money amount paid to the nominee in case of death or maturity. ( life cover amount) |
| Premium Paying Term | The number of years you pay premium/ money to company |
| Policy term | The term (number of years) the policy will mature. |
| WROP ( Term Plan) | With return of premium plan |
Term insurance vs life insurance – The key difference
| Parameter | Life insurance | Term insurance |
| Basic coverage | Benefit is paid on death and /or survival of policy term. (differ policy to policy) | Benefit is paid ONLY on death ( except WROP) |
| Premium | High | Low |
| Life Cover | Low | High |
| Death Claim | Paid in all policies | Paid in all policies |
| Maturity Claim | Paid in almost all policies | Not paid ( except WROP ) |
| Tenure | Usual term is 5 /7 /8/11/16/ 21 or more number of years | Usual term people take is 10/20/30/50/60 or more years ( till age 99) |
| Type of Plans | Money back PlansRetirement PlansChild education planSimple Endowment PlansAnnuity PlansSolution based plans | Pure risk coverWith return of premium PlanLimited payment PlansSingle Premium Plan |
| Surrender value | You can surrender the policy and take money ( reduced) back. | No surrender option available |
| Paid Up value | Policy acquire paid Up valueIn case you stop paying after 3 policy years ( usually) | No paid Up value |
Understanding Life insurance vs term insurance practically
Let’s understand the difference between life insurance and term insurance benefits before you consider buying any of the life insurance policies.
Cover amount
Life insurance coverage is the major difference between Term life cover and life insurance plan. The term insurance provides a very high coverage at a low premium as compared to any kind of endowment plans.
Example of life insurance plan : LIC New Endowment Plan 914- Details & Review
Premium amount
The term insurance is the cheapest and affordable life insurance plan which provides high risk coverage at low premium rates.
The premium depends on factors like age, policy duration, cover amount, health condition of buyer etc.
For instance if 32 year old Besti Singh buy a term insurance of Rs 1 crore for a duration of 35 years, the premium amount will be approximately Rs. 1050 monthly whereas if he buys an endowment policy for the same duration, he may have to pay approx Rs.22000 monthly.
Maturity benefit
It is a main reason why people go for endowment plans instead of pure risk cover plans is the maturity benefit.
Unlike Life insurance plans term life cover have no maturity benefit. However, there is another kind of term insurance plan called as term insurance with return of premium plans which provide 100% refund of the paid premium during the entire duration.
Risk cover vs Savings
both term life insurance and life insurance policies provide risk coverage for the holder.
But the difference lies between the amount of coverage and savings.
The investor may feel endowment plans are cheaper as these life insurance plans have matured benefits ( mind the high premium) but believe me you pay a high premium here.
One can consider a purchase term plan as they provide better life cover at a low premium rate.
Flexibility
one can surrender the life insurance policy and take the reduced benefit (reduced money amount). But term plans, do not offer any maturity benefit.
This, if you stop saying the premium, the benefit of the policy terminates and the policy lapses.
Tax Benefit
the policy holder Can claim the tax benefit with both Life insurance & term insurance under section 80C, 80D and 10 (10 D) of the income tax act 1961.
80C and 80D are applicable for premium paid and 10(10D) provides tax benefit in case of the death and maturity benefits.
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