Should one buy life insurance or term insurance

2021-02-22

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Life is uncertain, and thus insurance coverage is essential to deal with any unpredictable difficulties and emergencies in life. There are several different types of insurance policies available in the market.However, selecting the best plan out of all the available options is tricky and has to be based on certain important parameters such as risk apetite, objective of buying the plan, number of dependents, etc.

Detailed research and knowledge are always beneficial in making the right choice and help select the best insurance policy.

People often consider choosing between term insurance and a life insurance policy.

There are many aspects by which term insurance and life insurance policies differ from each other. Let's understand some basic differences between the two to help you choose better.

Key Takeaways

Term insurance offers pure financial protection with low premiums but no maturity benefits.
Life insurance combines protection with savings or investment, offering maturity benefits at higher premiums.
Both types offer tax benefits, but conditions vary, especially for maturity payouts.
Choose term insurance for affordable risk cover and life insurance for long-term financial goals.
Understand surrender, flexibility, and bonus options before choosing a plan.

What is a Term Plan?

As the name suggests, term insurance plans provide coverage for a specific period in exchange for a regular premium. These plans are designed to protect against the financial impact of premature death. If the policyholder passes away during the policy term, the insurer pays a fixed death benefit to the nominee or beneficiary.

One of the most prominent benefits of investing in a term insurance plan is that it provides high coverage at low premiums. So, even in your absence, your family's financial requirements can easily be fulfilled, thanks to the substantial sum assured.

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What is a Life Insurance Plan?

A life insurance plan is a financial tool that offers both protection and savings. It ensures that your loved ones are financially secure in case of your untimely death. If something unfortunate happens to you during the policy term, the insurance company pays a death benefit to your beneficiaries.

Unlike a term plan, many life insurance policies also offer a maturity benefit. This means that if you outlive the policy term, you receive a lump sum payout. This amount can be used to fund important life goals such as your child's education, marriage, or your own retirement.

Whether it's a child plan, pension plan, or endowment policy, life insurance is meant to support you at every stage of life while helping you build long-term financial security.

Life insurance comes in many forms, each designed to serve different financial needs and goals. One of the most basic and widely known types is term insurance. However, people often confuse term insurance with other forms of life insurance, leading to comparisons that may not be accurate.

Aside from term insurance, some other life insurance plans include,

Whole life insurance plans
Endowment assurance plans
Money-back plans
Child plans
Unit Linked Insurance Plans (ULIP)
Pension plans

Why Should You Invest in Life or Term Insurance Policies?

Life is unpredictable, and financial responsibilities don’t pause during tough times. Investing in a life or term insurance policy is a practical way to secure your family’s financial future, especially in your absence. These plans act as a safety net, ensuring your loved ones can manage essential expenses like loan repayments, education costs, or day-to-day living.

Term insurance is ideal for those seeking high coverage at affordable premiums. It offers pure protection by providing a lump sum to your nominee in case of your untimely demise. On the other hand, life insurance policies go a step further by offering a blend of protection and savings. Many life insurance plans come with maturity benefits, helping you meet long-term goals such as retirement planning, child’s education, or wealth creation.

By investing early in these policies, you get better premium rates along with building financial discipline. Insurance isn’t just a backup plan but a smart step toward long-term stability and peace of mind.

Term Insurance v/s Life Insurance: Key Differences

Listed below are some basic and common differences between term and life insurance plans. Look carefully at the points below to choose the best insurance policy for yourself.

Coverage: Term insurance plans only provide coverage in the event of the policyholder’s death within the period of the policy, whereas a life insurance policy is a dual benefit for its owners. It provides both death as well as maturity benefits to the insured. It is a sort of investment that has multiple benefits.
However, the sum you avail at the expiry of life insurance is much lower than the amount that is benefited from term plans in the form of death benefits. Many insurance buyers prefer buying life insurance policies due to the dual benefit they provide, but it is recommended to always buy at least one term insurance, as you get a high sum at low premiums as compared to life insurance plans.
Flexibility: When it comes to flexibility, life insurance plans often offer more options compared to term insurance plans. Term plans are designed purely for protection and do not offer maturity benefits, surrender value, or a paid-up option if premiums are discontinued. This makes them rigid in structure, especially if your financial needs change over time.
In contrast, many life insurance plans come with features like surrender value, paid-up value, and the option to take a loan against the policy. Plans like ULIPs (Unit Linked Insurance Plans) offer even more flexibility as you can make partial withdrawals, switch between funds, or top up your premiums based on your financial goals and market conditions.
This adaptability makes life insurance plans a better fit for those looking for a combination of protection and financial planning over the long term.
Bonus and Other Benefits: There are no such benefits like incentives or any other kind of addition under term insurance plans. If there is a case of death, the assured amount or value is paid. Many other types of life insurance plans, like an endowment, money back, or child plans, provide you with bonus additions, loyalty additions, guaranteed additions, etc. Furthermore, these additional clauses included in the policy increase its benefits and usage.
Surrender or Conversion to a Paid-up Policy: Some life insurance plans offer certain benefits even if you stop paying premiums due to unforeseen reasons. If you have paid premiums for a minimum specified number of years, your policy may continue as a paid-up policy instead of lapsing entirely.
In a paid-up policy, the sum assured is reduced proportionally based on the premiums paid, but the coverage remains active until maturity or claim. At any point, if you decide to discontinue the policy altogether, you can surrender it. Upon surrender, you will receive a surrender value, which is a pre-calculated amount based on the terms of the policy and the premiums you’ve paid.
This feature offers a level of financial security and flexibility, even if you're unable to continue with the original premium payment schedule.
Term insurance plans, on the other hand, typically do not offer paid-up or surrender benefits. If you stop paying the premium, the policy simply lapses, and no benefits are paid. Since term plans are designed purely for risk protection and not for savings, they do not carry a cash value or offer any maturity benefits.

Tax Benefits: Many people believe that paying a higher premium for a life insurance policy automatically results in greater tax benefits under Section 80C of the Income Tax Act. Another common misconception is that all maturity proceeds from life insurance plans are completely tax-free.
In reality, tax benefits under Section 80C are capped at ₹1.5 lakh per year, regardless of how high your premium is. Additionally, the maturity benefit is only tax-exempt under Section 10(10D) if certain conditions are met, such as the annual premium not exceeding 10% of the sum assured (for policies issued after April 1, 2012).
It’s also important to note that term insurance premiums are fully eligible for tax deduction under Section 80C, and the death benefit received by the nominee is tax-free under Section 10(10D).
So, if your main goal is to avail tax benefits while ensuring financial protection, a term plan is a smart and cost-effective option to consider.

Disclaimer: Tax benefits are subject to change in tax laws. Please consult your tax advisor.

Premium Amount: When it comes to life insurance, higher coverage typically comes at the cost of a higher premium. As a result, many buyers may not be able to afford sufficient coverage under traditional life insurance plans. Additionally, the returns on such plans often range between 5%–7%, and these returns can be reduced further if the policy is surrendered mid-term. Administrative charges and policy fees also eat into the overall returns.
In contrast, term insurance plans are significantly more affordable. They offer high coverage at a much lower premium, making them accessible and efficient for pure risk protection. For example, a 35-year-old individual can secure a term policy of ₹20 lakh for 20 years at an approximate premium of just ₹6,000 per year.
On the other hand, a traditional endowment policy with no profit offering the same coverage may cost around ₹60,000 annually, while a with-profit endowment policy could cost ₹1,00,000 or more per year. Clearly, for those primarily looking for risk coverage, term insurance offers greater value at a fraction of the cost.
Therefore, the term insurance plans turn out to benefit more those people who are not financially strong and cannot afford much for their family, or they don't have a stable source of income and proper job security.

Difference Between Term Insurance and Life Insurance at a Glance

Aspect	Term Insurance	Life Insurance
Premium Amount	Offers high coverage at low premiums. Very affordable.	Requires a high premium for high coverage. It may not be feasible for everyone.
Returns on Investment	No maturity or return benefits. Purely for protection.	Offers average returns of 5–7%. Returns reduce if exited mid-term; admin costs also affect returns.
Tax Benefits	Premiums are eligible for deduction under Section 80C. Death benefits are tax-free.	Also eligible under 80C, but maturity benefits are tax-free only if the policy meets specific conditions.
Flexibility	Fixed and limited. No maturity benefit, surrender value, or loan options.	Offers surrender/paid-up benefits, policy loans, ULIP partial withdrawals, and top-up premium options.
Surrender / Paid-Up Option	No benefit if the premium payment stops. Policy lapses.	May continue as a paid-up policy with reduced benefit; surrender value available if closed.
Coverage Type	Covers only death during the policy term. No maturity value.	Covers both death and survival, depending on the plan. May include maturity benefits.
Bonus or Additions	Not applicable. No loyalty or profit-related additions.	Some plans include bonuses, loyalty additions, or guaranteed returns.
Overall Suitability	Best suited for pure financial protection needs.	Suitable for long-term goals like savings, retirement, or a child’s future.

How to Determine Coverage Amount While Buying a Life Insurance Plan?

The amount of coverage of an insurance policy or the death benefit of the policy should be enough to replace the after-tax income that the insurer would have earned if they had lived a full life. The insurance replaces the income that the insurer didn't have the chance to earn by living and working until retirement due to his/her premature death.

The insurance should cover an amount that is sufficient to maintain the proper lifestyle that will allow the family of the insurer to continue their lifestyle. The actual amount of the insurance depends on the current and probable future incomes, as well as the existing budget for premiums.

Wrapping Up

It is crucial to understand that investing in life insurance helps build a strong financial future. Different people have different outlooks towards choosing an insurance policy, but owning both life insurance and term insurance at the same time can be really helpful. One plan has dual benefits of investment as well as life protection, while the other provides financial security to your family by paying a minimal premium. All the points mentioned above can be of great help in selecting the best insurance policy that matches your needs and expectations.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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