Term vs traditional life insurance: Which one truly fits your financial goals?

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• Term insurance offers high coverage at low premiums, no savings.
• Traditional plans mix insurance and savings, with higher premiums.
• Term suits protection seekers; traditional suits savers.

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When people decide to buy life insurance, they are often presented with a common dilemma: whether to choose a term insurance plan or buy a traditional life insurance plan. Although both types of plans are used for financial security, they are created in a vastly different way. The choice between the two depends on what you want from the plan: risk protection or risk protection and savings.

What is term life insurance?

Term insurance is the most basic form of a life insurance plan. This insurance plan offers financial protection for a fixed period of time, for example, 20 years, 30 years, or 40 years. In the event of the policyholder’s death during the term of the insurance plan, the nominee will be paid the sum assured. But if the policyholder outlives the term of the insurance plan, there will be no payment, except in the case of a return of premium term insurance plan.

Since term insurance plans merely offer risk protection and do not offer any savings feature, the cost of term insurance plans is relatively lower compared to traditional life insurance plans. This makes it possible for people to buy a larger amount of life insurance coverage at a relatively lower premium cost.

What is traditional life insurance?

Traditional life insurance plans, such as endowment plans or money-back plans, provide risk protection and savings. In addition to offering a death benefit, these plans also offer maturity benefits in the event that the policyholder survives the policy term. Some of these plans also pay bonuses based on the performance of the insurer.

These types of policies are usually favoured by people who need disciplined savings along with life insurance. However, the premium costs are substantially higher since a portion of it is allocated to the savings/investment portion.

Difference in cost and coverage

The main difference between the two is based on cost and coverage. Term insurance policies provide high coverage at very low premiums. Traditional policies, on the other hand, provide lower coverage for the same amount of premium, since they combine both insurance and savings.

For an individual looking for high financial security for their dependents, term insurance is more efficient. Traditional policies are suitable for individuals who value guaranteed returns and are willing to pay higher premiums.

Returns and flexibility

Term insurance policies do not provide any returns unless an additional option is purchased. Traditional policies provide maturity benefits and sometimes bonuses. However, the returns may not necessarily be market-linked.

Flexibility is also a point of difference. Term insurance policies are very simple and easy to understand. Traditional policies are complex and have complicated structures and terms for surrender.

FAQs

1. Which type of policy is best suited for young earners?

Young earners who are looking for high coverage at low premiums will find term insurance policies best suited for them.

2. Do traditional policies provide guaranteed returns?

They generally provide maturity benefits, but the actual returns depend on the type of policy and the bonuses declared.

3. Can I purchase both term insurance and traditional policies?

Yes, many individuals purchase term insurance policies for their protection needs and other investment products for their savings.