Term Insurance Vs Life Insurance: What's the Difference?

2024-06-24

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Term insurance and life insurance are essential financial instruments. Various types of life insurance plans, play an important role in meeting your financial goals and maintain a financial safety net.

As there are different types of life insurance plans, you must choose the right one that will be aligned with your life goals. A term insurance plan is the purest form of a life insurance plan that is used for the financial protection of the family.

So, what is the difference between a term insurance and life insurance? Let us understand the difference between these insurance plans, which will further help you to choose the right insurance.

Key Takeaways

Term insurance may seem similar to life insurance, but it isn’t. Learn the difference to choose the right fit accordingly.
Term insurance offers excellent coverage at a low cost, but life insurance can help you save and invest for the future.
Life insurance builds value over time, and on the other hand, term insurance is easy to discontinue, so flexibility differs.
Depending on what your financial goals are and what stage of life you are in, you should choose the best policy.
Both Term as well as Life Insurance offer tax benefits, but life insurance also offers financial security along with savings.

Difference between Term Insurance and Life Insurance

Term insurance and life insurance are the two most popular insurance policies in India. While term insurance provides large coverage for a fixed duration, a life insurance policy offers lifelong coverage to the policyholders.

The purpose of a term insurance is to ensure that the dependents can continue their life financially unaffected by the demise of the policyholder. On the other hand, a life insurance plan would act as an asset in the later years of the life. The policyholder will get an opportunity to create a legacy for their younger generation.

While both these plans have their own set of benefits and limitations, it is essential to understand the basic nature of these policies so that you can choose the best one as per your financial needs.

Death Benefit: The principal benefit of a term insurance policy is the death benefit amount (sum assured). The death benefit is paid out to the nominee in case the policyholder passes away during the policy term. However, a term insurance plan does not have any maturity value. Thus, if the policyholder survives the policy term, the plan simply expires and does not give any amount in return.

A life insurance plan, on the other hand, has a death benefit and maturity benefit. It depends on the type of life insurance plan you choose. Some of the plans offer guaranteed benefits while some of the plans offer assured benefits.

Risk Covered vs Savings: Term insurance is a pure risk coverage plan. It helps you with a large sum of cover at affordable premium. With this plan, the policyholder can be ensured that their dependents have an adequate sum of money in case of their sudden demise.

However, if you wish to provide for your family’s or your future financial needs such as vacation, buying a home, higher education of your children, their marriage, etc. you can buy a life insurance cum savings plan. Such plans can help you save money to build a corpus for your future endeavors and even save for retirement.

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Flexibility: Surrendering a term insurance plan is much easier as compared to a life insurance plan. You can simply stop paying the premium to stop policy benefits and the term plan lapses.

Life insurance plans, however, are assets with increasing value with each premium payment. Thus, you need to deposit every premium to ensure full maturity benefits. You can choose a shorter premium payment term to avoid long-term liability. For example, pay all the premiums within the first five years of the policy.

If you stop paying the premiums before completing the premium payment term, the life insurance will acquire a paid-up value. You can revive the policy within two years of this, or receive the surrender value which is usually a fraction of the paid-up value.

Premium Amount: Term insurance and life insurance premiums are different for the same amount of coverage.

For example, a term insurance policy with a cover of Rs 50 lakhs will have a premium of about Rs 7,000 per annum for a 30-year-old individual. A life cover of a similar death benefit would have a premium of Rs 1 lakh to Rs 5 lakhs per annum depending on the benefits.

Thus, if you want to provide adequate financial protection to your family, term insurance is the go-to solution. Life insurance plans, however, can safeguard individual financial goals for your family.

Tax Benefits: Both life insurance and term insurance plans qualify for tax benefits under sections 80C and 10(10D). Investments of up to Rs 1.5 lakhs in the life insurance or term insurance will qualify for deduction from your taxable income. However, since term insurance premium is usually lower you will need other investments to maximise the tax benefits.

Life insurance plans offer maturity benefits and cash flow options as well. These pay outs you receive from the life insurance plans are exempt from tax under section 10(10D).

	Term Insurance	Life Insurance
Death & Maturity Benefits	Only the death benefit is payable. Plan expires on maturity	A minimum guaranteed sum is payable as the death benefit. Maturity benefit is payable upon the expiry of the plan.
Risk Coverage & Savings	Provides a large coverage amount, does not have an investment value	Provides reasonable coverage and high savings and investment value
Flexibility	Simply stop the premium payments to close the policy	Premiums increase the policy value, and surrendering the policy reduces the policy benefits
Policy Term	Cover for 5 years to up to 99 years of age	Minimum policy term of 10 years up to lifetime (100 years of age)
Premium Amount	Only a nominal amount payable as the risk premium ranges between 0.1% to 1% of the death benefit	The annual premium can range between 3% to 10% of the death benefit
Tax Benefits	Premium eligible for deduction under section 80C	Premiums are eligible for tax deduction u/s 80C. Survival and maturity benefits exempt from tax u/s 10(10D)

If you are looking for a policy that has the advantages of both these policies, you can opt for iSelect Smart360 Term Plan by Canara HSBC Life Insurance that offers comprehensive coverage at a minimum and flexible premium options along with return of premium option. That means your premiums will be paid back if you outlive the policy term. Secure your future with the right life insurance plan and protect your loved ones.

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

Did You Know?

According to the Annual Report 2023, only 10% of Indians have adequate life insurance coverage.

Source: IRDAI

Term Insurance Vs Life Insurance – Which One Should You Choose?

The choice can take a while, as there are various factors to keep in mind. Here’s a little breakdown to help you make a wise and informed decision.

Based on Age & Life Stage (Young professionals, parents, retirees)

A person who is young and just getting started on the professional front has entirely different priorities compared to someone who is about to retire. Therefore, age, life stage, and presence of dependents significantly influence your insurance needs. Here’s how you can select it.

Young professionals can get term insurance to ensure the family is covered in case of any unfortunate event. Since its premiums are also nominal, you need not worry about the extra expense.
Parents: Life insurance can be a good pick for those who have dependents. The maturity amount can be used for your child’s education or marriage or act as a financial cushion.
Retirees: If you are nearing your retirement age and want to build wealth for your successors, want to leave a legacy behind, or simply are looking for financial security for your loved ones, life insurance works for you!

Based on Financial Goals (Pure protection vs. investment needs?)

The main difference between term insurance and life insurance is that they suffice different financial goals. Some people look only for protection, while others seek savings and investment options with tax benefits.

Pure Protection: If you are only looking for a way to secure your dependents financially in case of an untimely demise, term insurance works best for you.
Investment and Savings: If your aim is to save for future expenses, such as your child’s education and marriage or your own retirement, then life insurance can help you with it.

Based on Budget & Premium Affordability (Low vs. High premium options?)

How much you can or cannot afford also plays a major role in choosing coverage plans. Know that term insurance has lower premiums and offers very high coverage, while life insurance has additional savings and investment options but at a higher cost.

Low Premium: Term insurance is the one where you can get substantial coverage at quite a low premium, which is pretty affordable for all.
Higher Investment Potential: Life insurance may have a higher premium, but it has options for you to accumulate wealth and offers long-term financial benefits.

Common Myths About Term & Life Insurance

Many misconceptions about life insurance discourage young people from making the right decision. Let’s debunk some of the most common myths to help you stand out from the crowd.

Myth 1: Term Insurance Isn't Worth the Cost

Reality: Term insurance is actually a critical financial protection that you can offer your family members, and that, too, at a minimal cost. There might not be any maturity benefit (unless you opt for a return of premium plan), but it sure lets you have peaceful sleep at night.

Life Insurance - Top Selling Plans

We bring you a collection of popular Canara HSBC life insurance plans. Forget the dusty brochures and endless offline visits! Dive into the features of our top-selling online insurance plans and buy the one that meets your goals and requirements. You and your wallet will be thankful in the future as we brighten up your financial future with these plans.

Family Shield: Enhanced Protection

iSelect Smart360 Term Plan

3 Plan options
Life cover till 99 years
Steady income benefit
Block your premium at inception

Start Young, Pay Less, Stay Secured

Young Term Plan

Life cover till 99 years
Coverage for spouse
Block your premium rate
Covers 40 critical illness

Fixed Returns, Zero Risks & Worries

iSelect Guaranteed Future Plus

4 Plan options
Life cover + Guaranteed benefits
Accidental death benefit
Premium protection cover

Myth 2: Life Insurance is Only for the Wealthy

Reality: There are so many different premium levels that you can not simply set a bar that it is only for the rich. People from all income groups can easily afford life insurance if they choose the right premium.

Myth 3: Young Individuals Don’t Need Insurance

Reality: The best time to buy insurance is at a young age, as you are given the power to get the lower premiums. It ensures financial protection for any sort of future uncertainties you may come across.

Myth 4: Employer-Provided Insurance is Sufficient

Reality: Employer-provided insurance may seem like a good option, but it would not cover the needs of your family after a while. For long-term financial requirements, you should have an independent policy.

Myth 5: All Insurance Plans Offer the Same Benefits

Reality: You just saw how similar term and life insurance look and how different they can be. So, it is wrong to assume that all plans offer the same benefits. They all serve different purposes, and it is essential to choose one as per your specific requirements.

Conclusion

Whether you choose term insurance or life insurance, the choice completely depends on what your financial goals, responsibilities and budget are. Term insurance would be best if you want to secure your loved ones, and life insurance is a great option if you are looking for a way to have a good savings component along with life protection.

For flexibility, security and growth, you can go for the iSelect Guaranteed Future Plus plan by Canara HSBC Life Insurance. Our plan comes with comprehensive life cover with wealth creation opportunities and customisable benefits that can be a perfect fit for your financial needs. Now that you are all informed, making a well-planned insurance strategy and the right decision would not be such a big deal for you.

Glossary

Sum Assured: The amount payable to the nominee in case of the policyholder’s demise within the policy term.
Maturity Benefit: The payout you get after completing the policy term. (Applies for life insurance and not for a term plan)
Paid Up Value: The reduced sum assured after you stop paying premiums for the insurance after a certain period.
Surrender Value: The amount you receive after terminating the plan before its maturity.
Premium Payment Term: The duration for which you should pay premiums in order to keep the plan active.

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.