There are different types of life insurance policies. You may choose traditional life insurance plans that provide life cover along with maturity benefits. Another option is a term plan, which is a pure life cover and provides only death benefits in case the policyholder passes away during the policy duration.
While choosing between traditional life insurance and term policies, you need to consider some parameters that are listed below.
1. Death benefit
This is one of the biggest differences between term insurance vs. life insurance policies. Term plans offer death benefits if an unfortunate incident takes place during the policy term. Traditional insurance plans offer death and maturity benefits. However, the death benefits available are much higher in term plans when compared to traditional life plans.
2. Risk covered vs. savings
The premium payable on term plans is lower. This allows you to procure a higher sum assured. However, the benefits are paid to your beneficiaries only if something untoward happens to you during the policy period. In comparison, traditional life insurance policies also include maturity benefits along with death benefits. Therefore, you may use these plans to meet future financial goals along with ensuring the financial security of your loved ones. However, if you are looking for a plan that offers a higher sum assured at an affordable premium, a term plan is ideal for you.
3. Flexibility
Term insurance plans are easier to surrender; you may simply discontinue the premium payment and allow the policy to lapse. Additionally, insurance companies may provide you with the option to convert the term plan into an endowment policy offering the same coverage at a higher premium. On the other hand, if you do not pay the premium on your conventional life insurance policies, you lose the policy benefits. If you surrender the policy before the end of the term, you lose the maturity benefits. The insurer will pay only the total premium paid after certain deductions.
4. Premium amount
To procure higher coverage under a traditional life cover, you need to pay a greater premium. Therefore, it is likely that you may have financial limitations due to which you may invest in a lower life cover. Additionally, the returns on traditional life plans are low; the sum assured reduces if you surrender your policy before its maturity. The returns are also affected by the policy administration charges. Compared to all these limitations, term plans are more affordable and enable you to procure higher coverage at a more affordable premium.
5. Tax benefit
Some individuals think that because they pay a higher premium for traditional plans, they are able to benefit from higher tax deductions under section 80C of the Income Tax Act, 1961. Additionally, some even think that the maturity benefits are tax-free. However, the maximum limit under section 80C remains the same for both term insurance and traditional life insurance irrespective of the premium amount.
Life insurance is crucial in your overall financial portfolio. Including a term plan and a traditional plan is advisable. A term plan allows you to secure the financial future of your loved ones when you are not around. A traditional life cover helps you to meet your life goals if you outlive the policy period. Consider the aforementioned points and make an informed decision.
