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Should one buy life insurance or term insurance?

dateKnowledge Centre Team dateFebruary 22, 2021 views168 Views
Should one buy life insurance or term insurance?

Life is uncertain, and thus an insurance coverage is essential to deal with any upcoming difficulties in life. Several insurance policies are available in the market, but selecting the best out of these according to one's requirements is based on different factors. Several factors are important to understand and should be kept in mind while planning to buy an insurance policy. Detailed research and knowledge are always beneficial in making the right choice and helps 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 policy differ from each other. Let's understand some basic differences between the two.

What is meant by a term plan?

It can be clearly understood by the name itself; term insurance plans are defined as the payment of a premium for a fixed period of time. It covers the risk that might be caused due to premature death. In case of the untimely death of the insured, the policy provider is bound to pay the death benefit amount to the beneficiary.

There is a major plus point of getting term insurance plans; it provides high coverage at low premiums. So, even in your absence, your family's financial requirements can easily be fulfilled as you are assured to avail a high sum.

What is meant by a life insurance plan?

Life insurance plans help you get financially secured and safe. In case of premature death, the financial loss suffered by your family can be compensated with life insurance. For example, there are child insurance plans that help in shaping your child's future. Likewise, there are pension plans which promise you a handsome amount lifelong and keep your old age in safe hands. Therefore, life insurance plans can be found in every stage of life to provide you financial safety.

Life insurance has many varieties, and these together constitute several types of life insurance plans. Among these different types, term insurance plans are also one. Generally, people get confused and compare term insurance with other types of life insurance plans.

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
  • Pension plans

Why should you invest in life or term insurance policies?

So, why should one invest in insurance? The main reason to buy insurance is to hedge a health risk. These risks may be uncertain and thus require a huge amount of money. Health risks include cancer risk, organ failure, any unexpected illness, or accident. o There is a monetary cost to this risk, and thus, buying term life insurance may payout for these risks. It may also alleviate potentially higher financial costs.

The most prevalent health risk that one hopes to alleviate is premature death, and if the insurer passes away prematurely, his/her dependent has to bear the financial burden and the loans that the family owes. Hence, to prevent these types of situations, one should buy insurance.

How much coverage to choose 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 he/she 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 the proper amount that will allow the family of the insurer to continue their lifestyle. The actual amount of the insurance depends on the present and the probable future incomes and the existing budget for premiums.

Term insurance V/S Life insurance

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 case of premature death of the policyholder within the period of the policy, whereas a life insurance policy is a dual benefit for its owners. It provides both deaths as well as maturity benefits to the insured. It is a sort of investment that has multiple benefits.

Although, 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 it provides, but it is recommended to always buy at least one term insurance as you get a high sum at low premiums as compared to the life insurance plans.

Flexibility

In some aspects, term insurance plans can turn out to be firm and inflexible as they don't provide any paid-up or capitulated amount and also don't possess any maturity benefits. In comparison to this, life insurance plans are easy to avail.

Also, the ethnicity of term plans turns out to be beneficial as you are assured with the paid-up and a capitulated amount. You can also get the benefits of policy loans under such plans. Also, when you go for ULIPs, you can debit partially, change, or pay additional premiums.

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 things involved in the policy increases its benefits and usage.

Capitulate and end the policy

There are also some other life insurance plans, which offer you some benefits even if somehow the premium gets ceased or gets closed due to some reason. If your premiums get discontinued, and you have reimbursed the premium for a specific year's count. Still, you can enjoy its benefit as your policy would be paid-up.

Under this paid-up policy, the total amount will get reduced, but your policy would still be active. Whenever you want, you can choose to bring that policy to an end by closing it. Moreover, when it gets closed, you will be rewarded with the capitulated amount.

Tax Benefits

Sometimes, a misconception arises among people that an individual will be benefited more against the taxation under 80C of the Income Tax Act for the premium which is paid for a life insurance policy even if they are having a high amount of premiums. Along with this, there is also one misconception where people misunderstand that the maturity benefit they will receive is also tax-free.

Moreover, it is important to understand and note down that the premium has to be paid for the term life insurance needs not to be in less amount. It is also eligible for tax deduction under section 80C of the Income Tax Act. So, if it is like that, someone wants to get engaged or invest in any insurance plan to avail or enjoy the tax benefit, then they can opt to invest in any term plan.

Premium amount

If any individual wants to enjoy more coverage over a life insurance policy, then they need to pay a larger amount of premium value. Furthermore, because of a high premium, a large number of insurance buyers are not able to avail proper coverage over it. The return of investment from this policy ranges between 5-7% and gets lower if one exits the policy in the middle. The amount which is associated with the administration also significantly reduces the returns.

In contrast to it, the term insurance plans turn out to be more cheap and easy to buy and thus, is proved to offer more coverage at a low amount. For instance, if a person is 35 years old and wants to get term insurance of Rs.20,00,000 for 20 years, then he is liable to pay an annual premium of Rs. 6000.

In comparison to this, a without-profit endowment policy with a similar death benefit will have an annual premium of 60,000 along with a profit endowment policy that will cost about Rs.1,00,000 per annum.

Therefore, the term insurance plans turn out to benefit more to 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.

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 to own 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.

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Frequently Asked Questions (FAQs) for Term Insurance

This being a term plan doesn't offer any payout after maturity or expiration date.

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 70 years of age.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly.

If your key purpose is to give your Family financial protection, go for the term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, a term plan pays a part of the sum insured to treat your disease.

Term insurance riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term policy remains active until the expiration date.
  • Income Rider: The rider ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to ask while buying Term Insurance?

  1. 1. Amount of premium you have to pay based on your age, habits, education, and monthly income
  2. 2. The total number of benefits covered in the term plan. Do they include benefits that you care about the most?
  3. 3. How to save money on tax if you pay for the term plan?
  4. 4. Do they offer regular income options?
  5. 5. Can you change the coverage and premium in the future?
  6. 6. Does the claim consider valid if death occurs outside India?
  7. 7. Which kind of death is not covered by insurance?
  8. 8. Can NRIs take term insurance? If yes, what are the conditions?
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