An essential component of financial planning is life insurance, which provides income security to the family in case one dies during years of working. There are two major life insurance forms: term and traditional life insurance. Both of them give death benefits to the beneficiaries but operate differently.
This blog will draw a comparison between term life insurance and traditional life insurance in the context of the benefits that it encompasses. Understanding its key differences could help you decide what kind of policy suits your needs and budget.
Meaning of Term Insurance
Term life insurance is a contract that provides only death benefit coverage during a defined duration, which can only be paid out if a death has happened. Term policies are a cost-effective option since the premiums remain the same throughout the term and cover only the risk of death during the term period.
Benefits of Term Life Insurance Include:
- Lower Cost: Premium rates for term life insurance are significantly lower than whole life due to the same amount of death benefit. Your premium level depends on when you buy the policy, your age at purchase, and your health.
- Level Premiums: Term premiums remain the same throughout a term. It allows a person to lock the rate while still young and healthy.
- Custom Terms: The term length can be adapted to fit your situation so you can use it to pay off a mortgage, cover college costs, or provide for family members until retirement. High Death Benefit.
- Higher Initial Death Benefit: Dollar for dollar, in the early years term, insurance pays a much higher amount of death benefit than permanent life.
- No Cash Value: Term policies accrue no cash value. While this is a drawback, it also makes term life affordable.
Term life is excellent for a person's temporary needs, such as young families needing coverage to protect them. It is perfect for covering debt and replacing lost income. Coverage ceases at the term's expiry unless more term insurance is purchased.
Meaning of Traditional Life Insurance
Whole life, or Traditional life insurance, is the policy that protects you for the entirety of your life, provided you pay the premiums. It also builds cash value, which you can borrow against. However, permanent insurance typically has higher premiums than term insurance in the early policy years.
Benefits of Traditional life Insurance include:
- Lifelong Coverage: Premium paid-up for Traditional life insurance ensures one for the entirety of his or her age. As such, death benefit is payable anytime in a lifetime.
- Dividends: Most whole-life policies accrue benefits invested in other forms of paid-up insurance, lower premiums, or growth cash savings.
- Cash Value: The whole life policy accrues with cash value on a tax-deferred basis, and every such gain can be drawn as a loan or money.
- Fixed Premiums: Premiums remain fixed during the duration of the policy, and they never go higher.
- Guaranteed Death Benefit: The death benefit that whole life insurance pays is a guarantee, and it does not reduce as long as premium amounts continue to be paid toward the policy.
Whole life insurance is good for permanent needs, such as final expenses or estate planning. It can also be suitable as an additional retirement investment vehicle because it can provide for the accumulation of long-term cash value. However, premiums are substantially higher than if the policyholder bought term insurance.
What is the Difference Between Term Insurance and Traditional Life Insurance
| Comparison Aspect | Term Life Insurance | Whole Life Insurance |
| Cost | Generally, it costs 5-10x less than whole life for equivalent death benefit amounts at younger ages. Premiums increase after each renewal. | Premiums are fixed and guaranteed not to increase but are typically higher than early-year term life premiums. |
| Investment Component | Does not have a cash value account funded by premiums. Premiums cover only the death benefit. | Includes a cash value account funded by premiums, which accumulates over time. |
| Policy Term | Covers a set period, typically 10-30 years. | Covers the insured's whole life as long as premiums are paid. |
| Premiums | Start low but increase after each renewal. | Fixed for life but cost more in early years. |
| Death Benefit | Pays only the face amount. | Equal to the face amount plus accumulated cash value. |
| Uses | Suitable for temporary needs. | Better for lifelong protection and cash accumulation. |
The chart below illustrates a sample comparison of term life versus whole life insurance for a 30-year-old male:
| Aspect | Term Life Insurance | Whole Life Insurance |
| Initial Death Benefit | ₹5,00,000 | ₹5,00,000 |
| Annual Premium | ₹400 | ₹1,500 |
| Premiums paid in 20 years | ₹8,000 | ₹30,000 |
| Cash value after 20 years | ₹0 | ₹25,000 |
| Death Benefit after 20 years | ₹5,00,000 | ₹5,25,000 |
Which is better to invest in Term Insurance or Traditional Life Insurance?
So when trying to decide between term and whole life insurance, here are some guidelines to choose the right policy for your needs:
- Generally, term life insurance is much better suited to the purpose of coverage for debts or family income replacement for young people because it is much less expensive and it provides an initial high death benefit.
- But, if you want lifelong insurance and can develop cash value on a tax-deferred basis, then your whole life is a better choice.
- Get term insurance if you are short of funds; protection is needed for its purpose now. Supplement with whole life later as income increases.
- Think about converting term policies to whole life insurance later on. This ensures that you can lock in those lower introductory rates with the possibility of converting to permanent coverage.
- Please choose term if you already hold permanent insurance and want to top up with coverage for a specified duration. Choose a term if savings or investing an overage beyond the life policy versus adding more to pay the policy premium.
- Choose whole life insurance for no need to requalify every 10-30 years and a desire to lock in lifelong rates now.
- Choose whole life insurance for the forced savings aspect and a desire to build cash within the policy.
Which one is best for you depends on your present age, income, goals for coverage, and desire for cash value versus low-cost insurance. Whichever you choose, life insurance is most affordable when you are young and healthy. All these make obtaining coverage a smart financial move.
Conclusion
Life insurance is a vital component of an individual's financial plan, and the correct one must be chosen based on budget needs and goals. The only way to help you do this is by understanding the apparent differences between term and whole life insurance. Term life is temporary, giving affordable protection, while real life is permanent and builds up cash value. Weigh the benefits carefully and talk to an insurance agent to help select the right policy and protect you.