Understanding The Difference Between Term Insurance And Traditional Life Insurance

Term insurance is a type of life insurance policy under which a specific benefit is paid if the life assured passes away during the policy term. In case the life assured survives the policy terms, no maturity benefits are usually paid under the plan. The policy does not have any savings components and it's premium is primarily based on the life assured's age, medical history, and sum assured amount chosen. 

Traditional life insurance is a type of policy that provides death benefits alongside maturity benefits. The premium paid under this insurance is used for two purposes - savings and life coverage. 

A lot of people get confused between the features of both these plans and are unable to match the suitability of these plans with their circumstances. Below is a list of comparisons of the benefits of both of these insurance policies. 

Benefits Compared: Term Insurance vs Traditional Life Insurance

The list of the comparison of benefits are as follows: 

• Death Benefits

Term insurance policies provide a death benefit if the life assured dies within the period of the policy. No maturity benefit is provided under the same. The policy holder has the option to receive the paid premiums if he goes with a term plan. However, in life insurance policies if the insured dies during the policy period, his family will be provided with death benefits and bonus. And if the life assured survives the policy terms,he can avail of the maturity benefits. 

• Coverage vs Savings

In terms of risk coverage, term insurance plans provide death coverage. If the life assured passes away, his family will get the sum assured. Since term plans only provide death coverage and no maturity benefits, the premiums are lower and the maturity is higher. Those who are only concerned about death coverage can purchase this policy. On the other hand, if someone wants to build an investment along with death cover, then he can go for traditional life insurance policies, which invest a portion of the premium into investment and the remaining into death coverage

• Flexibility

A term insurance policy is much more flexible in terms of surrendering than traditional life insurance. To surrender a term insurance policy, the assured just needs to stop paying the premium and then his policy cover and benefits assured under the policy terminates. However, with traditional life insurance policies, if an individual surrenders his policy before the completion of the policy term, then he will only be able to recover the paid-up value. Also, term insurance can easily be renewed and can be converted into any other endowment just by paying the necessary premium. 

• Premium Amount

The premium amount differs hugely in terms of term insurance and traditional life insurance. In term insurance plans, the entire premium amount is allocated for providing a life cover, while in life insurance, a part of the premium is allocated for life cover and another is invested. As term insurance only provides death benefits, the premiums are very low and provide higher coverage. At the same time, traditional life insurance policies also provide a maturity benefit and have higher premiums. Many life insurance policies also provide low returns. 

• Tax Benefits

Premiums paid under both the policies are allowed as deductions under Section 80C of the Income Tax Act, 1961. Also the death benefit is tax-free under Section 10 (10D). 

Endnotes

For investors, it is important to understand that life insurance is a crucial part of good financial planning. It is beneficial to own both term life insurance as well as traditional life insurance. As both have its own merits and demerits it is in the hands of the policy purchaser what suits them the best. The above mentioned points can help to make an informed decision in order to select the best insurance plan according to their suitability. 

Also read: Monthly vs Lump-sum Pay-out in Term Insurance

Does It Make Sense for You to Buy a Joint Term Life Cover with Your Spouse?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.