You must have noticed that life insurance today is a critical tool to safeguard the financial future and independence of one’s family. In fact, many individuals are using insurance as a means to build a corpus and protect the financial standing of their family members. With the increase in popularity, insurance has also introduced several types of plans to help take care of distinct needs and requirements. Two of the most common life insurance today are term life and whole life insurance plans. It is their features and associated benefits that will make the plan lucrative for your needs. While both are types of life insurance they are designed to cater to specific needs and are somewhat different from one another. For instance, whole life insurance will offer you life cover for your entire lifetime. It will also offer a cash value component and allow you to borrow money in an emergency. On the other hand, term insurance will offer you a life cover for a predefined period and offer death benefits to your policy nominee. It may allow you to add rider benefits to extend your coverage and its scope. Though similar, there are a few differences between the two insurance plans. Hence, when looking for a suitable plan it is advised you know the term vs whole life insurance plan’s features and compare their scope as per your need.
What is Term Life Insurance?
A term insurance is an insurance plan that is suitable for those who seek protection for a specific term. This type of plan will offer you high coverage and is a pure protection plan that offers death benefits to the policy nominee in the event of the sudden death of the insured. However, you will not receive any premium refund or maturity benefit if you outlive the policy. The lack of cash value benefit could be a reason why you have to pay a low premium for a term plan compared to other life insurance. This affordable feature often makes term plans suitable for those with limited budgets.
What is a Whole Life Insurance Plan?
A Whole life insurance is an insurance plan that will offer you coverage for your entire life. These plans come with a lifelong tenure ensuring you remain financially protected throughout your life. Additionally, they offer you features of both insurance and investment tools. In other words, with a whole life insurance policy you avail of life coverage along with cash value. It allows you to access a lump sum amount from your saved-up premium after you have accumulated a significant premium. However, you must note the money you access from the whole life insurance plan would be treated as a debt that you have to repay during the course of the policy or as defined by the insurer. Your failure to repay the borrowed sum will lower your policy’s death benefit and cash value.
What are the Perks of Term Insurance?
Having a term insurance plan can benefit you in more than one way –
Affordability: As mentioned, term insurance plans come with lower premium amounts than other life insurance policies. This makes it affordable for many. You can easily use a term insurance calculator to determine what premium amount you are likely to pay for a certain cover. Subsequently, you can compare the premium with other plans.
Easy to understand: Being a pure protection plan, you will find term plans to be straightforward. They only offer life coverage and no other cash value, making the features simple and easy to understand. This also adds to their transparency.
What are the Downsides of Term Plans?
- Limited coverage: Unlike most insurance plans, term plans will offer you only life coverage. This means you will not get any premium refunds or cash value from the plan.
- Limited tenure: This plan will also offer protection only for the specified period, with the coverage ending on the expiration of the term.
- No savings benefit: It doesn’t offer a wealth-building feature due to its lack of savings components. So it will not be suitable for you if you seek more than protection.
- Limited tax planning: Compared to other life plans, term plans may not prove to be an effective tax-saving tool for you.
What are the Perks of Whole Life Insurance?
The key benefits of whole life insurance include –
- Comprehensive coverage: As the name suggests, whole life insurance plans are designed to offer lifelong financial protection to the policyholder.
- Borrowing facility: Once you have made significant premium payments you can withdraw cash value or borrow against the corpus to meet unforeseen financial needs. The plan can offer you tax-free loans and withdrawals, which can prove beneficial during an emergency.
- Cash value: The cash value aspects of the whole life plan can make it a predictable financial bet where you can grow your corpus over time if the policy allows it.
What are the Downsides of Whole Life Insurance?
Before you get a whole life plan, be mindful of these –
High cost: When compared to term insurance plans, whole life insurance policies come with a higher premium amount. Also, you may pay the surrender charger in case it lapses before its actual due date.
Impact on death benefit: The death benefit from this plan may be affected if you do not repay the borrowed sum. Make sure to discuss with the insurer the terms of the borrowing and repayment window to plan payment schedules and clear debt. Also, pick plans with the best claim settlement ratio to increase your family’s chances of accessing the sum.
Who Should Take a Term vs Whole Life Insurance Plan?
Term life insurance plans are cost-effective options, especially if you are young and healthy. Getting a plan early in your career can help save on premiums and build a safety net for your family easily. On the other hand, those who seek coverage for a full lifetime and also want to create an avenue to cash value may consider whole-life insurance plans.
Regardless of which plan one opts for, one can use an insurance premium tool to understand their coverage and premium liability. Also, when selecting a suitable plan, it is highly advised to factor in your financial goals, age, and desired tenure for coverage.