In Mumbai, amidst the clamour of local trains and the aroma of street food, lived Rajesh, a hardworking software engineer with dreams as vibrant as the city itself. Rajesh’s mind was constantly abuzz with plans for his family’s future. As he delved into the financial domain, he encountered two options: the term plan and life insurance policy.
Understanding term plans and life insurance policies
Life insurance policy
A life insurance policy is a financial option that blends insurance coverage with investment. It not just provides death benefits but even accumulates considerable cash value over the long term, which may be withdrawn or borrowed against as well.
Term plan
A term plan is a pure form of life insurance that provides coverage for a specified period, known as the policy term. In exchange for regular premium payments, the insurer promises to pay a lump sum amount, known as the death benefit, to the nominee if the policyholder passes away during the policy term.
Features of term plans
Death benefit
They provide a substantial death benefit to the nominee in case of the policyholder’s demise.
No maturity benefit
Term plans do not offer any maturity or survival benefits.
Affordability
Term plans are highly affordable, making them accessible to a wide range of individuals.
Flexible policy terms
Policyholders can choose the policy term according to their needs and financial goals.
Rider options
Additional riders, such as critical illness or disability coverage, can be attached to enhance protection.
Simplicity
Term plans are straightforward and easy to understand, making them an ideal choice for those seeking basic coverage.
Tax benefits
Premiums paid towards term plans are eligible for tax deductions under Section 80C of the Income Tax Act.
Online availability
They can be easily purchased online, reducing the need for extensive paperwork.
Family security
Term plans provide peace of mind, ensuring that the family’s financial stability is maintained even in the policyholder’s absence.
Convertible options
Some term plans offer the option to convert to a more comprehensive policy later.
Benefits of life insurance policies –
Cash value accumulation
These policies accumulate a cash value over time, which can be withdrawn or used as collateral for loans.
Dual purpose
Life insurance policy serve as both insurance and investment purposes, catering to long-term financial goals.
Dividend payments
Some policies provide dividends to policyholders, sharing in the profits of the insurance company.
Loan facility
Policyholders can borrow against the cash value, offering a source of emergency funds.
Wealth creation
Life insurance policies, such as endowment plans, offer a disciplined way of saving and growing wealth.
Retirement planning
Certain policies, like pension plans, are designed to provide a regular income during retirement years.
Tax advantages
The maturity proceeds from life insurance policies are eligible for tax exemptions under Section 10(10D) of the Income Tax Act.
Liquidity
Partial withdrawals from policies offer liquidity during financial emergencies.
Diverse options
There are various types of life insurance policies available, allowing individuals to choose according to their risk tolerance and financial goals.
Life insurance can be a valuable tool for estate planning, ensuring a smooth transfer of assets to beneficiaries.
Distinguishing between term plans and life insurance policies –
Cash value
Life insurance policies build cash value over time, while term plans do not offer any cash value.
Purpose
Term plans focus solely on providing financial protection, while life insurance policies combine protection and investment.
Premiums
Term plans have lower premiums compared to life insurance policies due to their pure insurance nature.
Maturity benefit
Life insurance policies provide maturity benefits, whereas term plans do not have a maturity benefit.
Flexibility
Term plans offer flexible policy terms, while life insurance policies might have fixed terms.
Coverage duration
Term plans have a fixed coverage period, whereas life insurance policies can offer coverage for the entire lifetime.
Investment element
Life insurance policies include an investment element, making them suitable for long-term financial goals.
Riders
Both term plans and life insurance policies can have riders, but riders are more commonly associated with term plans.
Surrender value
Life insurance policies have a surrender value, allowing policyholders to exit the policy before maturity.
Tax benefits
Both term plans and life insurance policies offer tax benefits, but the nature of benefits can differ.
Premium allocation
In life insurance policies, a portion of the premium goes towards insurance and investment, whereas term plans are solely for insurance coverage.
Risk appetite
Term plans are ideal for risk-averse individuals seeking pure protection, while life insurance policies cater to those looking for investment opportunities.
Policy complexity
Life insurance policies can be more complex due to their dual nature, while term plans are straightforward.
Premium flexibility
Life insurance policies might offer premium flexibility, whereas term plans usually have fixed premium payments.
Emergency funds
Life insurance policies offer more accessible emergency funds through policy loans and withdrawals.
Legacy planning
Life insurance policies can serve as inheritance tools, whereas term plans focus on immediate financial protection.
Returns expectation
Life insurance policies aim to provide returns on investment, while term plans do not provide returns beyond the death benefit.
Premium variation
Term insurance plan premiums can remain stable throughout the term, while life insurance policy premiums might change based on market conditions.
Long-term commitment
Life insurance policies require a longer commitment due to their investment element, while term plans offer shorter coverage terms.
Liquidity options
Life insurance policies provide more options for liquidity due to cash value components. However, no liquidity option is available on term insurance. The term insurance proceeds are available only post your demise to help your family members financially.
In Rajesh’s pursuit of safeguarding his family’s future, he meticulously evaluated the differences between term plans and life insurance policies. Recognising the significance of both, he opted for a term plan to ensure his family’s immediate protection and a life insurance policy to nurture their long-term financial aspirations. As the sun set over Mumbai, Rajesh’s choices stood as proof to his dedication to providing a secure and prosperous life for his loved ones.
