With the ever-increasing spread of the COVID-19 pandemic, many people have realized that they need to be more thoughtful and analytical about their finances, especially life insurance. So, now that you have decided to look into your insurance plans, which one should you choose, Term life insurance or Whole Life Insurance?
Term and whole life insurance plans offer the most basic and comprehensive coverage required from any insurance plan. While term insurance provides death benefits or coverage for a stipulated amount of time, whole life insurance provides lifelong coverage. Let us take a detailed look at both of these to help you make a better choice.
Term Life Insurance
Often known as a pure protection plan, term life insurance provides coverage only for a certain amount of time. It promises a death benefit or financial coverage to the nominee in case of the death of the policy holder during the term of the insurance plan. It is designed to cover your dependents and act as an income substitute in case of an untimely death.
Term insurance plans often tend to be the cheapest plans by a considerable amount, which is what makes them attractive to most people. Another benefit of term life insurance is that the pay-out as well as the premium remain the same throughout the term.
Term insurance is generally purchased for a specific time period such 5, 10, 15 or 30 years. However, if you fail to pay the premium, your policy cover ceases and you cannot reap any of the benefits of the plan.
Term Plan Example: A 30 year old non-smoker male opts for a term life plan of INR.1 crore cover for a policy period of 50 years.
| Age | Gender | Lifestyle | Sum Assured | Policy Term | Annual Premium |
|---|---|---|---|---|---|
| 30 years | Male | Non-smoker | INR 1 Crore | 50 years | INR 11,352-14,626 |
Whole Life Insurance
Whole life insurance provides coverage lifelong, it doesn’t expire as long as you keep paying the premium. It also provides cash value, which is an investment component included in the policy. The cash value grows and the return goes on accumulating. When whole life insurance is cancelled, the cash value is returned to the policyholder.
Whole life policies are generally level premium. This means the monthly rate stays the same throughout the duration of the policy. The premium paid by you is split into two parts, one part goes into the insurance component and the other helps build your cash value. You can also make a withdrawal or borrow some amount from the cash value. However, the amount borrowed from your cash value will be deducted from the death benefit.
Whole Life Insurance Example: A 30 year old non-smoker male opts for a whole life plan of INR.1 crore cover for a whole life policy term
| Age | Gender | Lifestyle | Sum Assured | Policy Term | Annual Premium |
|---|---|---|---|---|---|
| 30 years | Male | Non-smoker | INR 1 Crore | 70 years | INR 3,67,800-3,84,351 |
Term Life Insurance vs Whole Life Insurance
| Policy Features | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Policy Length | Stipulated Period | Lifelong |
| Premium | Stays the same throughout the policy period | Stays the same throughout the policy period |
| Returns | No returns, just death benefits | Return on Cash Value |
| Cost Effectiveness | Extremely cost effective, provides high coverage at low premium | High cost, provides high coverage as well as cash value with a guaranteed rate of investment return |
Key Takeaways
While term insurance policies are beneficial for families who need an income replacement for a pre-defined term, whole life insurance policies are beneficial for those who have a lifelong dependent or want to leave an inheritance.
Term life insurance is also perfect for people who currently can’t afford whole life insurance since term insurance plans can be converted into whole life insurance plans. In order to make a choice between these insurance plans, it is important that you first analyse your financial goals, life stage and investable income and make an informed decision accordingly.
