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Term Insurance or Whole Life Insurance? Which one you will pick?

Know the difference between Term Insurance and Whole Life Insurance

Sumi is 27-year old working with an IT firm. She had heard a lot about the benefits of taking insurance at an younger age. However, she was confused between term insurance and life insurance and wondered if there were any difference between the two.

In general parlance, used interchangeably and although both of them are meant to safeguard life, it is not same.

What is Term Insurance?

Term insurance is a life insurance plan that is meant to provide financial cover to the loved ones of the insured person in case of any unfortunate event such as death or accidents. During the policy tenure, the beneficiary has the right to claim the insurance benefits.  Now-a-days many insurance companies provide for partial and permanent disability which can lead to a loss in income. New age term insurance plans also have the benefits of critical illness cover. The critical illness covered by the insurance varies from company to company but many of the critical illness like cancer, coma, heart attacks are covered by these policy plan. Term plan is also beneficial if you have any outstanding loans.

You have the option to select lump sum or monthly payout.  Term insurance gives you a higher life cover with lower premiums.

It is also important to take term insurance plans at the earliest. It is because as the premium payable at a younger age is less. The premium increases according to your age and health conditions. It means that you will have to shell out more money if you delay opening a term insurance even by 5 years for the same life cover. Also, in term insurance, the premium payable during the entire duration remains same. However, the cover is only payable at the time of death or loss of employment.

What is Whole Life Insurance?

Just like term insurance, the objective of life insurance is also providing financial security to the insurer’s family members. Whole Life insurance provides cover till the insurer attains 100 years of age.  The policy holder gets to decide the sum assured amount when purchasing the policy. After the policy matures, the coverage is paid to the insured individual.

In addition to providing for life cover, it also gives the benefit of bonus.  Some portion of the premium paid is used by the insurance companies to invest in assets. When the investments fetch gains, the policy holder also gets a share of it as well. Life insurance policy holders have the option to borrow money.

Here are the some of the differences between term insurance and life insurance:

Premium:

Term insurance provides high life cover at a low premium. Hence, it is easier on the pockets than whole life insurance policies. In whole life insurance, the individual pays premium for 10 or 15 years and the cover is valid till 100 years of age. As a result, the individual has to pay higher premium amount.

In case of whole life insurance, the premium remains the same throughout the tenure. However, in case of term insurance, once the policy matures, new premium amount comes into existence.

The premiums paid towards term insurance are not refunded if there are no unfortunate events. However, in whole life insurance policies, the premium is paid out if the insurer survives till 100 years of age.

Time horizon: 

In term insurance plans, individuals can decide the tenure of the policy. Typically, the maximum tenure of the term plan is 49 years. However, in whole life insurance, the time horizon of the policy is 100 years.

What one will be the right one for Sumi?

As Sumi has recently joined the work force and don’t have any financial obligations, a term plan would be better for her. She can pay the premium on a monthly or yearly basis based on her convenience. Sumi will also be eligible for a higher cover by paying less premium. As she is still young, she has to pay less premium. She also the option to increase her life cover after major life events such as marriage and birth of children.  

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