Term vs traditional life insurance: what’s the real difference?

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Life insurance can feel confusing because there are so many products in the market. At its core, though, most policies fall into two big categories: term insurance and traditional life insurance (like endowment or money-back plans). Knowing the difference helps you choose what actually suits your needs instead of just going by what agents pitch.

What is a term plan?

A term insurance policy is the simplest and cheapest form of life cover. You pay a premium every year, and if you pass away during the policy term, your nominee gets the sum assured. If you survive the term, there’s no maturity benefit. It’s pure protection — like paying for health insurance, except it’s for your life. Because it’s risk-only, premiums are low and you can get high coverage amounts.

What is a traditional plan?

Traditional plans combine insurance with savings or investment. These include endowment policies, whole life covers, and money-back plans. Here, if you survive the policy term, you or your family receive a lump sum maturity benefit, often with bonuses. It’s marketed as a “double benefit” — protection plus savings — but premiums are much higher, and the returns are usually modest compared to mutual funds or PPF.

Key differences

The biggest difference lies in cost and returns. Term insurance gives you large coverage at low cost but no payout if you survive. Traditional policies are costlier, provide lower life cover for the same premium, but offer a guaranteed maturity value. One is about pure protection, the other about a mix of cover and long-term savings.

Which one should you choose?

Most financial planners recommend buying a term plan for protection and keeping your investments separate. That way, you get maximum life cover at a low price, while your savings are free to grow in instruments that give better returns. Traditional plans might appeal if you prefer forced savings and guaranteed but modest returns, but they shouldn’t replace a solid term policy.

FAQs

Q1. Why is term insurance so cheap compared to traditional plans?

Because it only covers risk. There’s no savings component or maturity payout, so the insurer charges less.

Q2. Can I buy both term and traditional policies?

Yes, many people take a term plan for protection and a smaller traditional plan for disciplined savings.

Q3. Are returns from traditional policies good?

They are stable but generally low, usually around 4–6% annually. Other investments like mutual funds may provide better growth.