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  • Term vs. Whole Life Insurance Plans

    If you are planning to buy a life insurance policy, you have probably heard of both term insurance plans and whole life insurance plans. While essentially providing benefits in case of the insured’s (policyholder) demise during policy tenure, these plans vary in a lot of ways.

    Term insurance

    Term insurance is a type of life insurance wherein premium is paid by the insured for a fixed period of time during which death benefits will be paid out in case of the insured passes away. In case the policy matures, no benefits are paid out to the respective beneficiaries. Therefore, term insurance policies are sometimes called as pure life insurance policies where you receive high sum assured by paying nominal premium for a fixed tenure. Individuals also receive flexibility when choosing sum assured or tenure.

    However, the benefits of term insurance are very limited as compared to other life insurance policies. For one, there is no maturity or survival benefit available with term insurance plans. This is not a good option if you are looking at life insurance policies as savings or investment instruments, rather than purely for the death benefits provided to your beneficiaries.

    Whole life insurance

    Whole life plans are complete life insurance packages that provide flexibility in choosing sum assured, tenure etc. while providing survival and/or maturity benefits according to policy documents. In these policies, the premium may be collected for a specific tenure or throughout the life of the insured.

    Resulting benefits include the ability to ‘borrow’ money from the insurance company at low rates of interest, receive a lump sum as survival benefit, receive segregated payouts of the premium, get maturity benefits etc. Essentially, whole life insurance policies are meant to provide cover to the insured throughout his/her entire lifetime.

    Difference between Term and Whole Life Policies

    Premium
    • Term insurance policies can be availed by paying lower premiums than whole life policies.
    • Premium is constant throughout the policy tenure in case of whole life plans, while term insurance policies employ dynamic premiums when the term of the policy is set to be renewed.
    • Premiums will not be refunded in any scenario in term insurance policies unless a genuine claim against death of the insured is made, in which case a hefty sum assured will be paid out. Whole life plans provide premium payouts in case the insured survives the policy tenure as selected while buying the policy.
    Tenure
    • Term plans offer fixed tenures during the course of which the benefits of the policy are applicable. Whole life have flexible tenures usually applicable till the insured reaches 100 years. Benefits will be paid out when the insured turns 100.
    Cash value
    • In case of whole life terms, the premiums paid by you are invested in your protection fund as well as in other investment avenues. If the insurer makes profit on these investments, they declare a bonus a part of which is given to you. Term insurance does not have this feature.
    • The cash value that is built through your premiums in whole life plans can be utilized to receive loans at low interest rates. The interest is collected and kept by the company while the base loan amount is deducted from your sum assured. This does not affect future premium amounts. Term plans do not provide this benefit.
    • Whole life plans act as both savings and protection plans while term insurance is a pure life insurance plan with no additional benefits apart from death benefits.

    So, What Should You Choose?

    Ideally, if you are an unmarried individual in your 20s or 30s, a term plan is the best option for you. These plans will offer you decent protection for reasonable premium payments. Also, if you have pressing health issues, term plans are ideally placed for getting the highest benefits in the short term.

    If you are a married person with 2 kids, a mix of whole and term life represents a great choice. You can do this by buying a term rider on top of the whole life policy. On one hand, the whole life policy offers you cash value that can be used at various points of your life, while the term rider will protect your dependents with high monetary benefits.

    If you are an applicant over the age of 40 years, whole life policies will be the best fit for you. The plan will provide cover all throughout your life, while effectively being cheaper than term plans at this stage of your life. Apart from this, you can be confident that your next generations are left with good inheritance when you pass away.

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