Taking care of a family’s future needs is one of the warmest acts one can ever perform. As much as life can be calm and joyful at times, it also throws a few surprises here and there. Life insurance is the best cover one can get for their loved ones in case of such events
However, navigating the maze to get the perfect cover can be a tedious task. You will come across two major insurance plans, namely,
term insurance and whole life insurance. Both serve different purposes for varying needs. In this blog, you will understand the difference between a term insurance plan and whole life insurance.
What is a term insurance plan?
A term plan is a simple life insurance policy that can be availed for a particular period of time, called a term. The length of the policy term determines how long your nominee can claim the sum assured after your demise.
How it works
- You pay a certain amount of money as a premium every year or every month.
- In case of your death during the term, your nominee gets a sum assured.
- You survive the policy term which expired; your coverage ceases to exist, and you do not receive a payout.
Why it’s popular among families
- High sum assured at a low price: As there is no savings component involved in this policy, the premium you pay is considerably lower. A young adult can get a high sum assured at an affordable rate.
- Straightforward: You only pay for the insurance coverage. There are no added complications like investing in the stock market or worrying about other investment-related risks.
- Replace lost income: The insurance cover can help your family with paying off your liabilities like home loans or other pending bills. It can also be used for the higher education of your children if you are not around to provide financial assistance.
What is whole life insurance?
A whole life plan is a life insurance policy that offers coverage for your entire life and has a saving/lending component. The coverage period is until you attain the age of 99 or 100, whichever is applicable.
How it works
- You pay certain sums of money (Premiums) for a certain number of years as decided by you.
- A certain percentage of the amount you pay goes into the cost of insurance coverage, and the rest goes into a bonus/savings bank.
- Upon your death, your nominee can claim the death benefit in addition to the accumulated bonuses from the savings bank.
Key features
- Lifelong coverage: You do not need to worry about your family after your demise as they will be able to claim the sum assured at any point until you reach the age of 99 or 100.
- Inevitable maturity benefit: Since you are certain to grow old one day, the maturity benefit will surely benefit your family.
- Higher premiums: You need to pay a comparatively higher amount of money every year to claim the sum assured.
- Return of premiums: The amount of money paid towards the premium is returned to your nominee upon your death.
Key factors to consider while buying life insurance
It is essential to understand your needs and choose between the two life insurance policies on an individual basis. Here are a few factors that can help you in making this crucial decision.
1. Your financial dependents and liabilities
If you have young children or aged parents or even an ongoing home loan, then a term insurance plan will help you replace the income that you contribute for their well-being
2. Your budget
Remember, an insurance plan should not jeopardise your everyday expenses. A term plan is an affordable way to get a fair amount of coverage for your family.
3. Your legacy
If you have already paid off all your liabilities and have sufficient savings, then a whole life plan can help you leave behind a legacy for your children or aged parents.
4. Riders or additional coverage
The two policies also offer optional add-on coverage called riders. Riders like critical illness and accidental disability coverage might increase the premium amount; hence, it is essential to consider purchasing them based on your specific needs and the inclusions provided by the insurance company.
Which plan is best suited for you?
A term plan is best suited for young professionals, the breadwinners of the family, young parents, and those with home loans or dependents to look after. A whole life plan is advisable for high-net-worth individuals, elderly people, and those willing to build their children’s future.
It is best to create a list of your monthly expenses and liabilities, and discuss with your financial advisor about the most suitable plan for you and your family. Ask for a detailed description of the fine print and claim settlement procedure of the policy you are considering purchasing. Get your free consultation and analysis on the policies you are interested in before purchasing it.
Summary checklist
- Identify your needs: Understand whether you need a pure risk protection cover for a certain number of years or a lifelong cover with a maturity benefit. It is essential to set realistic expectations while purchasing a life insurance policy.
- Set a realistic sum assured amount: Set a realistic sum assured to cover your liabilities and family-dependent expenses. Ideally, the sum assured must be 10 to 15 times your annual income to ensure that you can cover your monthly expenses and save up for your children’s education.
- Calculate your existing liabilities: Set aside the amount of your home loan, personal loan, car loan, or any other existing liability. Ensure that the sum assured can cover these liabilities as well so that your family does not inherit your debts in case of an unforeseen incident.
- Go through the fine print: Go through the policy wording, claim rejection reasons, claim settlement ratio, and other terms and conditions before signing up for the policy. Carefully check the medical examination and disclosure of pre-existing diseases.
- Compare the costs and additional benefits: Get a quotation for the policy from various reliable companies and choose the one that fits your budget. Compare which add-on benefits are necessary and which ones can be avoided to reduce the premium amount.
