Term vs whole life insurance

TomorrowMakers ™

Term vs whole life insurance

13 July 2016
You’ve decided to provide financial security for your family and subscribe to a life insurance policy, but are stuck in the age-old debate – Term or Whole Life insurance?
 
 

Let’s have a look at the difference between two popular types of insurance – Term and Whole Life insurance.

What is Term Insurance: Term insurance policies are those that are for a fixed tenure, i.e. the coverage of the insured is for a certain period of time (called the ‘term). Eg: If Anand buys a term insurance policy at the age of 25 for a term of 20 years, the policy expires when he is 45 and he is no longer covered under the policy.

Related: Term Plans for Dummies

What is Whole Life Insurance: Under the whole life insurance policy, the insured is covered till death or on reaching 100 years of age. In case the assured individual survives beyond the age of 100, they receive a Maturity Benefit. In case of an unfortunate event, a death benefit is paid to his/her nominees.

Policy Tenure: Term life insurance is usually for a period of 5, 10, 15, 30, or up to 75 years and death benefits are given only when the insured expires during the term of the policy. The policy terminates upon death of the insured.

In whole life insurance, the insured is covered throughout his life, i.e. till his death or when he reaches 100 years, and death benefits are paid at the maturity of the policy.

Premium: Term life insurance is an appealing option for many because the premium is affordable and much lesser than those of whole life insurance policies.

Related: 6 factors insurers consider when calculating Life Insurance premium

Premiums become costlier for term insurance as one gets older.

Take for example, a 31-year-old widow Khyati with a 4-year-old son, Dev. Khyati has recently lost her husband and wants to do whatever she can to ensure her son is well taken care of even in her absence. She decides to take an Aegon Life iTerm insurance plan, which with an annual premium of Rs. 5,108 and a policy term of 44 years (75 years – current age), covers her for Rs.50 lakhs. She also has the option of opting for a Critical Illness rider, which would give her a lump sum pay-out in case she was diagnosed with a major disease, such as Ovarian Cancer. Thus, this term policy becomes an economical way to secure her son’s future and her own.

Premiums for whole life insurance policies are much higher than term policies, and premiums can be decided according to the sum assured that the insured wants to be covered for. As the policy covers the entire life of the person, death benefits will be surely given unlike in term policies. On the other hand, life expectancy among Indians suggests that living beyond the age of 75-80 years is quite rare. Additionally, the need for life insurance is highest when one has liabilities i.e. people who depend on them for financial support. After a certain age, when your children are independent and fending for themselves, this need reduces.

Dividend: A key difference between the two policies is that whole life insurance policyholders are eligible to dividends or cash value which is accumulated throughout the lifetime of the policy. This cash value can also be used to get loans against it. Term life insurance being pure protection plans, do not provide any kind of cash value.

Surrender: In the case of a Term Plan, if you surrender your policy and stop paying premium, your life cover ceases. With Whole Life policies, you can surrender the Policy before the term ends and can get the Value of the Plan as on that Day after some deductions, if the company’s policy allows it. Also, whole life plans allow you to stop paying premium but enjoy the life cover as long as the policy is not surrendered. However, the fact remains that whole life premiums are often so high that they are unaffordable.

Which is the best for you?

The reason why term plan is attractive is that it provides a high sum assured for a very affordable premium. If you are unmarried, it would be prudent to buy a term plan that covers you till you are at least 75 years of age. This is because if the policy ends before that age, and you want to take another plan, the premium can be very high. The reason for this is that at a young age, you are likely to get premium at extremely low prices because you pose a much lower risk. Plus, though you are unmarried right now, your liabilities are likely to increase in the future.

The major benefit of a whole life insurance plan is that it protects you for the entire length of your life, and is most suitable for someone who buys a policy early as the premium does not change throughout the term of the policy. It can also help fund sudden financial needs as the policyholder can borrow against it and can also withdraw from the policy.

To get started with buying insurance, the first step is knowing how much you need. Here’s a Life Insurance Calculator to help you.

 

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