sking to differentiate between a term plan and a life insurance plan is like asking to differentiate between a lipstick and a cosmetic. Can you tell me the difference? Well, your obvious answer would be that a lipstick is a type of cosmetic, correct? Similar holds true in case of term insurance and life insurance. A term insurance plan is nothing but a type of a life insurance plan. However, there are some points on which a term plan differs from other life insurance plans.
Before we move into the differences, let us understand the definition of life insurance, a term plan and other life insurance plans.
Life Insurance is a contract between the policyholder and insurance company that promises to pay a certain sum of money, in event of death or after a specified time, called policy tenure. This is how life insurance works.
What is a term plan?
A term plan is a life insurance plan which promises to pay a lump sum benefit (called the Sum Assured) if the life insured (the person whose life risk is covered) dies during the plan term. Since the plan covers only death risk (usually), the premiums are very low.
So, term plan is the purest form of Life Insurance which provides coverage for your life and usually has no maturity benefit except for Return of Premium (ROP) plan variant. With ROP term plan, the premiums paid during the plan tenure are returned, if you survive the entire plan duration. Whereas, in case of other types of Life Insurance plans like Endowment, Child, Money Back, ULIP, there is some amount of maturity benefit paid to the policyholder if he survives the entire policy tenure. Here’s why term plan is a must.
What is an Endowment Policy? Endowment Plans have both death benefit and maturity benefit. So, if the life insured dies within the policy tenure, his nominee would receive the sum assured as a death benefit and the policy terminates. However, if he lives until the end of the policy tenure, he would receive a maturity benefit. These type of plans usually have a component of bonus or loyalty additions payable on maturity along with the maturity benefit.
What is a Money Back Plan? Money back plans pay a portion of the Sum Assured at regular intervals during the plan tenure called the survival benefits. It also has both death and survival benefit
What is a ULIP? ULIP or Unit Linked Insurance Plans are market linked policies and can reap the benefits of the market returns. The benefit is not thus guaranteed.
Now that we know the basic meaning of a term plan and life insurance, let us discuss the differences.
Comparative analysis of term insurance vis-à-vis life insurance
- Traditional v/s market-linked
There are two types of life insurance plans. Traditional plans which pay a guaranteed benefit which is pre-determined and market-linked insurance plans where premiums are invested in a market and the benefits are market-linked.
Term Plan is a type of Traditional insurance plan whereas Life Insurance Plans, as a whole, can either be traditional or market-linked (Unit Linked Insurance Plans).
- Benefits promised
Term plans, except return of premium plans, pay only a death benefit. On the contrary, benefits payable under a life insurance plan depends on the type of plan selected. Endowment and unit linked plans pay either a death or a maturity benefit. Money Back plans have a pre-determined schedule of money at regular intervals.
- Type of Need fulfilled.
Term plans pay a lump sum benefit in case of premature death. As such, they replace the lost income and fulfill the income replacement need. Different life insurance plans, on the other hand, fulfill different needs. Child plans secure the future of your child while pension plans help in planning for your retirement. Lastly, unit linked plans fulfill your insurance-cum-investment needs. So, in case of life insurance you have different plans to match different needs.
Term plans have the lowest premium compared to all other life insurance plans. This is because term plans cover only your death risk. Other insurance plans pay you a maturity or death benefit, survival benefits (money back plans), bonus, etc. As such, the premium rates for such life insurance plans are higher.
Different types of Life insurance plans, serve different requirements. Endowment assurance plans pay a lump sum maturity or death benefit. Money-back plans pay a portion of the Sum Assured at regular intervals. Child plans secure your corpus through the inbuilt waiver of premium benefit which continues the plan even post the parent’s death. While, unit linked insurance plans promise attractive returns and insurance protection. Thus, each of these plans is completely different from each other.