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Whole Life Insurance and Term Insurance: What’s the difference?

Almost every family-inclined person feels like it is their responsibility to protect their family from the vagaries of fate. However, there is no way to ensure that your family will always be protected against tragedies. While there is no way to eliminate future tragedies, there’s definitely a way to prevent their financial consequences through the assistance provided by a ‘Life Insurance’. 

In this article, we will discuss Term Insurance vs. Whole Life Insurance: What’s the difference? While both of them are life insurances, they differ in their nature and serve different purposes.

Importance of Life Insurance

Every individual must get a life insurance policy to protect themself and their family at a time of rising financial volatility. The rise in workloads and responsibilities have been contributing to the increased stress levels. As a result, many individuals are suffering from illnesses and diseases. When an entire family is dependent on one member’s income, they find themselves in an extremely difficult situation when that one earning member passes away. Due to all these reasons, it is important to have life insurance.

A life insurance plan is a crucial part of your portfolio diversification. There are two kinds of life insurance plans, namely: Term Life Insurance and Whole Life Insurance. Many people get confused between them. Both provide benefits in case of the policyholder’s demise. However, both the plans vary in regards to the policy tenure, premium amount, cash value, etc.

Understanding the Meaning of Term Insurance

Term insurance refers to the premium payment for a fixed period of time. The insurance company is liable to pay the death benefit amount to the beneficiary or the nominee in case of the policyholder’s untimely death during the term insurance plan’s period. If the policyholder survives the plan’s term, generally no benefit is provided unless it’s a return of premium term plan.

Term insurance is a simple and affordable type of life insurance plan. It is specifically designed for protection and does not have any investments or savings component, making the premiums considerably low as compared to other life insurance plans.

Understanding the meaning of Whole Life Insurance

Whole life insurance plans combine the benefits of investment and protection for the insured’s entire life. Whole life insurance plans generally have an upper age limit of 100 years. These plans offer the opportunity of cash accumulation which builds during the entire tenure of the policy. 

Choosing Between Term Insurance vs. Whole Life Insurance

Both term insurance and whole life insurance have their distinct features and benefits. In order to make the right choice between these two plans, the individuals must compare their advantages and choose the plan which best suits their objectives and budget.

The following pointers can help you to understand the difference between Term Insurance vs. Whole Life Insurance, so that you can make an informed decision.

Premium

As compared to the whole life insurance plans, term insurance plans generally offer more affordable premiums. In case of a term plan, the full premium amount gets used for providing insurance coverage. However, in the case of whole life insurance plans, a part of the premium is used for insurance coverage while the remaining gets invested.

If the policyholder withdraws, surrenders or survives the maturity period, the accumulated amount is returned at the sum assured value. In case any profits are earned on the invested amount, the policyholders get to enjoy the bonus benefits.

Tenure

Term Plans, by nature, offer coverage for a fixed tenure which can be for 5, 10, 15, 20 or 30 years. However, in case of whole life insurance plans, the tenures are flexible and usually applicable till the policyholder reaches 100 years of age.

Cash Value

In contrast to the term plans, a part of premiums under whole life insurance is invested in financial instruments. Therefore, the cash value builds up with time. This cash value can be utilized by the policyholder for borrowing money at a cheap rate. However, in case of term plans, there is no such benefit. In addition to this, whole life insurance policyholders may withdraw a portion of their cash value during the policy’s tenure.

Therefore, individuals must consider all the features and advantages of these insurance plans before deciding which one is appropriate for them. They must also take in account their age, financial condition and the plan’s purpose.

Benefits and Bonuses

Let’s understand the benefits and bonuses offered by term insurance plans and whole life insurance plans through the table below:

 

ParametersTerm Insurance PlansWhole Life Insurance Plans
Death BenefitIn case of term insurance plans, only pre-decided death benefit is provided on the policyholder’s demise.Pre-decided death benefit is also applicable in whole life insurance plans. The beneficiaries and nominees get this benefit in case of the policyholder’s demise.
Death Benefit CoverageRelatively high as compared to the whole life insurance.Relatively low as compared to the term insurance.
Maturity BenefitNo maturity or survival benefit is provided in case of term life insurance plans if the policyholder survives the policy period.

Some term plans offer a return of premium option that returns the premiums back to the policyholders. .

Whole life insurance combines the benefits of death benefit and a maturity or survival benefit if the policyholder survives the period of the whole life insurance plan.
BonusesTerm plans do not provide any bonuses to the policyholders for staying invested in them. These plans are pure protection plans.Some whole life insurance plans may provide policyholders bonuses for staying invested.
Tax BenefitsAccording to Section 80C of Income Tax Act, 1961, tax returns up to Rs. 1,50,000 can be claimed annually on the premiums paid towards a term insurance plan. 

Section 10(10D) of the Act exempts the death benefit received under the term insurance plan from tax deductions.

Section 80C of the Income Tax Act, 1961 allows claim for tax returns up to Rs. 1,50,000 in a year on the premiums paid towards whole life insurance.

Section 10(10D) of the Act allows for the exemption of the death benefit and maturity benefit received from tax deductions.

Conclusion

Although whole life insurance and term life insurance are considered as life insurances, they differ in their nature and purpose. While whole life insurance builds cash value and promises a death benefit to the beneficiaries and nominees, term life insurance is a more affordable option. To decide which kind of policy must be included in your portfolio, you must take into account your financial goals and your family’s financial condition. If you enjoyed reading this blog article, check out the rest of our articles.

By Kashish

Content writer with a diverse portfolio spanning various subjects. With a seasoned background, I have been crafting professional content since 2019.

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